A new tax provision is reshaping how manufacturers finance new facilities. Under Section 168(n), a company building or expanding a U.S. production facility can now deduct 100% of the building’s cost in the year it opens, instead of spreading that deduction over 39 years. For a manufacturer investing $20 million in a new plant, that is the difference between a small annual write-off and a single deduction large enough to reshape that year’s tax bill entirely.
The provision came from the One Big Beautiful Bill Act (OBBBA), and IRS Notice 2026-16, issued in February 2026, added the detail needed to plan real construction decisions around the qualified production property depreciation rules. The deduction is generous, but it comes with a narrow eligibility window, specific documentation requirements, and a long recapture tail. Here is what manufacturers need to know before breaking ground.
Qualified production property (QPP) is non-residential real property used directly in manufacturing, production, or refining that substantially transforms a product. It applies to factory buildings and structures, not the land beneath them or unrelated office space.
The IRS defines “manufacturing” broadly as materially changing a product’s form or function until it becomes a distinguishable new item. Production is narrower, limited specifically to agricultural and chemical production. Refining fits within its ordinary meaning. In each case, the transformation has to be substantial.
Assembling components without changing them, packaging finished goods, or performing light finishing work generally will not qualify a space on its own. Getting this classification right is the foundation of any qualified production property depreciation claim.
Only the portion of a building directly used for the qualifying production activity counts. Everything else in the same structure, including administrative and support areas, is depreciated under the normal rules.
This distinction matters because most manufacturing facilities are not 100% production floor. Offices, break rooms, R&D labs, and showrooms typically sit inside the same building as the factory floor.
Space Type | Section 168(n) Treatment |
Factory floor, production lines, assembly areas | Qualifies for 100% deduction |
Loading docks and material handling directly tied to production | Generally qualifies |
Administrative offices and sales areas | Does not qualify; standard 39-year depreciation |
R&D and software development space | Excluded, even if in the same facility |
Employee parking and lodging | Excluded |
A manufacturer building an 80,000 square foot plant with 15,000 square feet of office space would allocate the deduction accordingly. The production portion gets the full 100% write-off. The office portion follows the standard schedule.
The window is specific and missing it by even a few weeks forfeits the benefit entirely. Construction has to begin after January 19, 2025, and the building has to be in service before January 1, 2031.
Requirement | Deadline |
Construction start | After January 19, 2025 |
Construction must be complete by | Before January 1, 2029 |
Property placed in service | After July 4, 2025, and before January 1, 2031 |
Election made on | The return for the year the property is placed in service |
There is a useful timing detail buried in the statute: a binding written contract for acquisition or construction, signed by the deadline, can establish the start date even if physical groundbreaking happens later. Manufacturers evaluating a facility right now should document that contract date carefully. It may be the difference between qualifying and not.
The 2029 construction completion cutoff also deserves attention. A project that breaks ground on time but runs into permitting delays, supply chain slowdowns, or extended buildout schedules could still miss the window through no fault of the planning team.
Building contingency into the construction timeline, and revisiting the schedule at each major milestone, protects the deduction from slipping away on a technicality.
The election is not automatic. It has to be affirmatively made on the return for the year the property is placed in service, and once made, it is largely irrevocable. The IRS has confirmed that proposed regulations are still forthcoming, and taxpayers may rely on the interim guidance until then.
Skip the election, or miss the filing, and the property defaults to standard MACRS treatment over 39 years. There is no fallback provision that lets a company claim it retroactively after the filing deadline has passed.
Because the qualified production property depreciation election is largely irrevocable, it deserves as much attention during planning as the construction budget itself.
If qualified production property stops being used in a qualifying production activity within 10 years of being placed in service, a portion of the deduction is recaptured as ordinary income under Section 1245.
This recapture window is longer than most manufacturers expect, and it applies even to legitimate business changes. A plant that pivots from manufacturing to warehousing, or that gets sold to a buyer who repurposes it, can trigger recapture regardless of intent.
A merger, a change in product line, or a decision to lease out part of the facility to a non-manufacturing tenant could all put prior years’ deductions at risk.
Any company claiming this deduction should model the recapture exposure as part of the original investment decision, not treat it as a distant hypothetical. That means thinking through the facility’s likely use over a full decade, not just the year it opens.
Section 168(n) and the permanently restored 100% bonus depreciation under Section 168(k) are separate elections that apply to different categories of property, and most manufacturing projects will use both.
A 100% bonus depreciation manufacturing facility project typically stacks all three treatments across one construction budget.
Provision | What It Covers | Deduction Rate |
Section 168(k) bonus depreciation | Equipment, machinery, fixtures (personal property) | 100%, permanent, for property acquired after January 19, 2025 |
Section 168(n) QPP | Factory buildings and structures (real property) | 100%, temporary window through 2030 |
Standard MACRS | Office space, non-qualifying real property | Depreciated over 27.5–39 years |
A single facility build-out commonly touches all three categories: the building shell under 168(n), the production machinery under 168(k), and the office fit-out under standard MACRS.
Modeling these separately, rather than treating a construction project as one lump sum, is where the real tax savings get captured or missed.
Companies planning new facilities, expansions, or major renovations in the next few years should treat this provision as a design input, not just a tax filing item.
That means engaging a tax advisor before finalizing floor plans, not after the building opens. Square footage allocation between production and non-production space should be documented at the blueprint stage, ideally with an engineering-backed cost segregation study, so the deduction can withstand IRS scrutiny later.
Construction contracts should be dated deliberately with the January 19, 2025 threshold in mind. And any company with export, import, or multi-jurisdictional manufacturing operations should model how this domestic-only provision interacts with their broader structure, since QPP applies only to U.S. facilities.
Cash flow modeling matters too. A 100% deduction in year one can create a large net operating loss depending on the size of the facility relative to the rest of the business, and that loss needs a plan for how it will be used or carried forward.
Building that kind of multi-year projection is exactly what we walk through in financial forecasting for small and mid-sized businesses. Treating the deduction and the cash flow consequence as a single planning exercise, rather than two separate conversations, avoids surprises at filing time.
Section 168(n) manufacturers with cross-border operations have one added factor to consider: the deduction applies only to U.S. facilities. A domestic subsidiary of an overseas parent still qualifies on its U.S. investment. So does a manufacturer weighing a U.S. build against a foreign one. But these companies are also managing consolidated reporting and multi-state compliance. Getting the allocation and documentation right from day one matters even more.
At ASAM LLP, we help manufacturers, from domestic producers to subsidiaries of publicly traded multinational groups, model the Section 168(n) election alongside their broader depreciation strategy before construction decisions are locked in. Our Tax Services team works through the eligibility analysis and election timing, while our Business Consulting & Advisory team can help model the cash flow and structural impact of a new facility investment.
If you’re evaluating a new plant or expansion, reach out to us on info@asamllp.cpa or call 1 (415) 788 2371 before you break ground.
Partner with our bilingual CPA team for expert guidance in tax, assurance, accounting, and advisory services tailored to your business needs.
San Francisco-Based CPA Firm Since 1986
Providing assurance, accounting, tax, and consulting services to local, national, and international clients with personalized attention and bilingual support.