WASHINGTON, D.C. — Manufacturers, refiners, and certain agricultural producers may now deduct up to 100% of the cost of new production facilities in the year they are placed in service, under interim guidance issued this week by the U.S. Department of the Treasury and the Internal Revenue Service.
What This Means for You
- Eligible businesses can claim immediate, full depreciation on certain new production buildings.
- The property must be placed in service after July 4, 2025, and before January 1, 2031.
- Companies must formally elect the deduction on their tax return and meet detailed eligibility rules.
Background on the New Depreciation Rule
The guidance, released in Notice 2026-16, explains how businesses can use a temporary “special depreciation allowance” created under the One, Big, Beautiful Bill Act.
Depreciation normally allows businesses to deduct the cost of property over many years as it wears out. Under this new provision, qualifying taxpayers can elect to deduct up to 100% of a building’s unadjusted depreciable basis — essentially its original cost for tax purposes — in the year the property is placed in service.
The new rule applies to “qualified production property,” generally defined as nonresidential real property — such as a factory building — used as an integral part of a qualified production activity.
What Counts as Qualified Production
The notice clarifies that a “qualified production activity” includes manufacturing, refining, agricultural production, or chemical production that results in a “substantial transformation” of materials into a new product.
For example, turning steel rods into bolts or processing crude oil into refined fuel would qualify. Activities such as packaging, labeling, office work, software development, research, parking areas, or storing finished products do not qualify.
The property must meet several conditions:
- Construction must begin after January 19, 2025, and before January 1, 2029.
- The property must be placed in service after July 4, 2025, and before January 1, 2031.
- The building must be located in the United States or a U.S. territory.
- The original use must begin with the taxpayer.
Leased property generally does not qualify unless specific ownership and control rules are met.
Election Required
Businesses must affirmatively elect the deduction by attaching a statement to their federal income tax return for the year the property is placed in service. The election must identify the property, its cost basis, and the portion designated as qualified production property.
Once made, the election generally cannot be revoked without IRS consent.
Recapture Risk
The notice also explains that if the property stops being used for qualified production within 10 years, businesses may have to repay part of the benefit through “depreciation recapture.” In simple terms, that means some of the previously deducted amount could be treated as taxable income if the building is converted to a different use.
Next Steps
Taxpayers may rely on the interim guidance until Treasury issues proposed regulations. Treasury and the IRS are requesting public comments within 60 days of the notice’s issuance.
The full notice is available at IRS.gov.
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