On February 20, the IRS released Notice 2026‑16, providing interim guidance on the Qualified Production Property (QPP) – a tax incentive created under the One Big Beautiful Bill Act (OBBBA) to spur U.S. manufacturing investment. While the IRS intends to issue regulations, taxpayers may rely on this notice until the proposed regulations are issued.
For businesses involved in manufacturing, production or refining, the notice clarifies what qualifies as QPP, how mixed‑use facilities should be allocated and how self‑rental arrangements can qualify.
What Is Qualified Production Property?
Under OBBBA, QPP is real property used as an integral part of a Qualified Production Activity (QPA), and must be placed in service after July 4, 2025, and before January 1, 2031. For newly constructed property, construction must begin after January 19, 2025.
The notice defines a QPA as manufacturing, production or refining of a qualified product.
- Manufacturing: Materially changing the form or function of tangible personal property to create a new item held for sale or lease. Minor assembly, packaging or labeling does not qualify.
- Production: Restricted to agricultural and chemical production, including cultivating crops and processing chemical compounds.
- Refining: Purifying or upgrading a substance into a more useful or higher-value product.
What Is Not Qualified Production Property?
Ineligible property includes any portion of property used for offices, administrative services, lodging, parking, sales activities, research activities, software development or engineering activities, or other functions unrelated to a QPA.
Integral Part Requirement
A central theme of Notice 2026‑16 is whether property is truly integral to a QPA. The question to ask is, does the property participate meaningfully in the substantial transformation of inputs into a distinct finished product?
The guidance draws a bright line between transformational activity and operations that, standing alone, don’t cross the threshold. Functions consisting solely of packaging, repackaging, labeling or minor assembly do not meet the substantial transformation standard and therefore do not qualify as integral production use. By contrast, areas tied to production oversight, material selection, production management and design‑spec development may qualify when they directly support the transformative process.
The notice also establishes a de minimis safe harbor: if 95% of a building or structure functions as an integral part of a qualified production activity, the entire property qualifies as QPP. This de minimis rule can simplify compliance when a facility is primarily dedicated to production.
Storage Rules: Raw Materials vs. Finished Goods
The notice differentiates between raw‑material storage and finished‑goods storage:
Raw‑Materials Storage
May qualify as QPP if both conditions are met:
- The materials are consumed in a QPA, and
- Production occurs in the same facility or on a contiguous parcel of land as the facility
Finished‑Goods Storage
Does not qualify as QPP.
Allocation: “Reasonable Method” Standard
When a facility contains both QPP and non‑QPP areas, taxpayers must allocate the basis. This includes facility infrastructure that serves both eligible property and ineligible property (such as a HVAC system or a sprinkler system). The IRS permits any reasonable allocation method, including approaches commonly used in cost segregation studies.
New Exceptions for Self‑Rental Property
The OBBBA excluded leased property from QPP eligibility. In a favorable development for taxpayers, Notice 2026-16 provides two important exceptions:
- Consolidated Groups: If the lessor and lessee are part of the same consolidated group, the property may qualify for QPP treatment.
- Commonly Controlled Entities: QPP may also apply when the lessor and lessee share at least 50% overlapping ownership, including:
- Sole proprietorships
- Partnerships
- Corporations
These exceptions significantly expand QPP availability for small and mid‑sized businesses that commonly use separate operating and real‑estate holding entities.
State Conformity Considerations
While Notice 2026‑16 provides clear federal guidance, businesses must also evaluate how their state tax jurisdictions treat QPP expensing. States vary widely in how they conform to federal depreciation rules, and many historically decouple fully or partially from federal accelerated cost‑recovery provisions. As a result, property that qualifies for 100% federal expensing may receive different treatment at the state level, affecting both current‑year deductions and long‑term tax planning.
Other considerations:
As attractive as the QPP incentive may be, it isn’t always the most advantageous path. There is an ordinary‑income recapture rule if the use of qualifying property changes within 10 years, meaning taxpayers could face an unexpected tax cost down the road. When combined with the fact that states do not always conform to federal expensing rules, it becomes important to evaluate whether QPP treatment is truly the best fit for a project. In some cases, other depreciable classifications, such as those available for certain interior improvements, may offer more consistent state‑level treatment and fewer long‑term concerns. Taking a step back to compare how different classifications impact both federal and state outcomes can help ensure the most beneficial overall result.
Final Takeaway
With the guidance Notice 2026-16 brings, taxpayers should review upcoming projects, property classifications and organizational structures to determine where QPP eligibility may apply. Early analysis and a well-executed cost segregation study can help ensure that taxpayers maximize this incentive.