The IRS issued Notice 2026-16 on February 20, 2026, creating the first substantive administrative framework for the new Qualified Production Property regime enacted by the One Big Beautiful Bill Act (OBBBA). Investors and advisors now have explicit guidance about which segments of nonresidential real estate can qualify for 100% bonus depreciation, provided statutory timing and other conditions are met. This article explains the core elements of the notice so owners, tenants, and holding structures can identify opportunities and avoid traps.
At its core, Notice 2026-16 links building components to on-site production activities. The guidance addresses definitions, the substantial transformation standard, how to treat mixed-use and multi-building facilities, certain lease arrangements, and the contours of recapture. Because the rules expand planning levers but also add compliance complexity, readers should view these provisions as both an opportunity and a responsibility: capture accelerated deductions where appropriate, but document and elect carefully.
Table of Contents:
Which activities and spaces can qualify as QPP
Notice 2026-16 narrows the set of eligible operations to activities that the statute calls Qualified Production Activities (QPA). The IRS clarifies that manufacturing involves materially changing the form or function of tangible personal property to create a distinct new item, while production is limited to agricultural or chemical outputs and refining means purifying raw or intermediate materials into higher-value products. The key fact pattern is whether the process results in a substantial transformation of inputs into something that cannot be readily returned to its prior state. Simple or cosmetic assembly and labeling typically do not meet that threshold and therefore do not convert the associated space into QPP.
Examples that illustrate the standard
To give practical context, the notice treats complex fabrication—such as converting steel rods into fasteners or integrated automobile assembly—as activities that satisfy the substantial transformation test. By contrast, operations that only package finished items or assemble non-altered components are excluded. Importantly, space used to receive and temporarily store raw materials within the same integrated facility generally qualifies, whereas storage of finished goods does not. These distinctions drive where owners can claim 100% bonus depreciation for building systems tied directly to production.
Property scope, units of property, and allocation rules
The definition of Qualified Production Property focuses on real property elements that are integral to a QPA and placed in service within the statutory window. Eligible items listed in the notice include building-level systems within production areas—such as HVAC, electrical, major plumbing lines, fixed fire protection, built-in conveyors, hoists, and certain storage for components. Each building is generally a distinct unit of property, but Notice 2026-16 permits aggregation when multiple buildings on same or contiguous parcels function as a unified production campus. That aggregation rule is particularly meaningful for industrial parks and multi-building manufacturing sites.
Mixed-use properties and allocation mechanics
In facilities with both production and non-production uses, only the production portions can be treated as QPP. The IRS explicitly allows cost segregation to allocate basis between qualifying and non-qualifying areas, and offers a de minimis election: if at least 95% of the physical space is integral to a QPA at placed-in-service, taxpayers may elect to treat the entire property as QPP. These allocation choices should be supported by contemporaneous documentation showing floor plans, NAICS activity codes, and the specific measurements used in the cost study.
Timing, elections, related-party leases, and recapture
The statutory timing rules are decisive for planning: construction must begin or acquisition must occur before January 1, 2029, and the property generally must be placed in service before January 1, 2031, to be eligible for 100% bonus depreciation. The notice also provides a safe harbor treating qualifying activities placed in service between July 5, 2026 and December 31, 2026 as QPAs when the activity’s NAICS code falls within sectors 31–33 (manufacturing) or subsectors 111–112 (agriculture).
Procedurally, taxpayers must make an affirmative, timely election on their return to claim QPP treatment, specifying either the full depreciable basis or the allocated portion in mixed-use scenarios. The election is irrevocable without IRS consent. Although QPP is real property for classification, the treasury indicates Section 1245-style recapture principles apply and a specific 10-year recapture window exists: if the property ceases to be used in a QPA within ten years after placed in service, previously accelerated deductions may be recaptured. Notice 2026-16 also clarifies that consolidated groups and commonly controlled entities (50%+ ownership) may qualify even when the tenant operates the production activity, which expands use in related-party leasing structures.
Practical planning steps
Given the notice’s complexity, owners and investors should align construction and acquisition timelines with the statutory deadlines, document how activities meet the substantial transformation test, evaluate ownership and lease arrangements for qualification, and model holding-period scenarios to assess recapture risk. Engage cost segregation specialists to support allocations in mixed-use settings and consult tax counsel before filing the QPP election. Thoughtful preparation lets stakeholders harness the enhanced depreciation mechanics while minimizing the chance of later adjustment or recapture.
