IRS Notice 2026-16 Provides Foundational Guidance on Qualified Production Property

On February 20, 2026, the IRS issued Notice 2026-16, the first substantive administrative guidance addressing the implementation of Qualified Production Property (QPP), enacted under the One Big Beautiful Bill Act (OBBBA). 

QPP is defined as any portion of U.S. nonresidential real property used by a taxpayer in a Qualified Production Activity (QPA). If statutory and timing requirements are satisfied, QPP is eligible for 100% bonus depreciation, allowing immediate deductions of qualifying building core and shell components. 

While this notice is preliminary guidance on Qualified Production Property, and the IRS is expected to issue regulations at a later date, Notice 2026-16 clarifies several key areas, including the definition of QPAs, the substantial transformation requirement, treatment of mixed-use facilities, aggregation of buildings, recapture mechanics, and most importantly, third-party lease structures. 

Key Takeaways 

• The IRS issued Notice 2026-16, providing the first substantive guidance on Qualified Production Property under the One Big Beautiful Bill Act. 
• QPP is eligible for 100% bonus depreciation if statutory and timing requirements are satisfied. 
• Notice 2026-16 clarifies qualifying production activities and property while also expanding planning opportunities but adds complexity and risk. 

Definition of Qualified Production Activity 

The OBBBA identified manufacturing, producing, and refining as QPAs. In addition, Notice 2026-16 further defines these terms: 

• Manufacturing: a material change to the form or function of tangible personal property that results in a new and distinct item of tangible personal property. 
• Production: limited to agricultural or chemical production activities. 
• Refining: the purification of raw or intermediate materials into a higher value product. 

To qualify, the activity must result in a substantial transformation of tangible personal property. 

Substantial Transformation Standard 

Notice 2026-16 requires that raw materials, inputs, or components be converted into an entirely different product. The change must be permanent in nature, and the materials cannot be readily returned to their prior state. 

Examples of qualifying substantial transformation include: 

• Converting steel rods into screw or bolts 
• Complex assembly processes that integrate component parts into a new product (e.g., automobile manufacturing) 

By contrast, minor assembly activities that do not materially alter the inputs, such as assembling gift baskets, do not satisfy the substantial transformation requirement. Only space used in connection with a qualifying QPA may be treated as QPP. 

Scope of Eligible Property 

QPP consists of real property that is integral to a QPA and placed-in-service within the statutory window. 

Eligible property generally includes base building systems located within production areas, such as: 

• HVAC systems 
• Electrical systems 
• Plumbing infrastructure (main supply and drain lines) 
• Permanently affixed fire protection systems 
• Built-in cranes or hoists 
• Built-in conveyor systems 
• Component parts storage areas 

Notice 2026-16 clarifies that areas used to receive and store raw materials qualify as QPP, provided they are located within the same property or integrated facility as the QPA. 

Non-Qualifying Areas 

Areas used for non-production activities are not eligible for QPP treatment. These typically include: 

• Retail space 
• Office space 
• Software development areas 
• Parking facilities 
• Minor assembly or labeling areas 
• Storage of finished goods 

Notably, storage of component parts may qualify, whereas storage of completed products does not. 

Integral Part Requirement and Unit of Property (UoP) 

A building or portion thereof must be an “integral part” of the QPA to qualify as QPP. 

Generally, each building is treated as a separate unit of property. However, Notice 2026-16 permits aggregation where multiple buildings operate together as a unified production facility and are located on the same or contiguous parcels of land. In such cases, the buildings may be treated as a single unit of property for purposes of the integral part analysis. 

This clarification is particularly relevant for large, multi-building manufacturing campuses. 

Allocation in Mixed-Use Facilities 

In mixed-use facilities, only the portions directly related to production activities may be classified as QPP. 

Notice 2026-16 expressly permits the use of cost segregation methodologies to allocate between qualifying and non-qualifying areas. 

Additionally, a de minimis rule applies, stating that if 95% or more of the physical space of a property satisfies the integral part requirement at the time it is placed-in-service, the taxpayer may elect to treat the entire property as QPP. 

Timing Requirements for 100% Bonus Depreciation 

To qualify for 100% bonus depreciation under QPP: 

• Construction must begin before January 1, 2029, or acquisition must occur before January 1, 2029. 
• The property must be placed in service before January 1, 2031. 

These deadlines create a limited planning window for taxpayers evaluating new construction or acquisitions of production facilities. 

Treatment of Third-Party Lease Structures 

The statutory language of OBBBA appeared to limit QPP to owner-operated facilities. Notice 2026-16 expands QPP’s utility in certain common ownership structures: 

• Consolidated groups 
• Commonly controlled structures with at least 50% ownership 

Under these circumstances, the property owner may qualify for QPP treatment even if the tenant conducts the QPA. 

This clarification significantly broadens the practical applicability of QPP for real estate holding company and operating company structures, related-party leases, and tiered ownership arrangements. 

Election and Recapture Considerations 

QPP treatment is available only through an affirmative election made on a timely filed return. 

The taxpayer must clearly identify one of the following: 

• The entire depreciable basis if the full facility qualifies 
• The specific dollar amount and description of the qualifying portion in mixed-use scenarios 

The election is irrevocable without IRS consent. 

Although QPP is real property in form, it would be subject to Section 1245 recapture principles. In addition, a 10-year recapture rule applies; if the property ceases to be used in a QPA within 10 years of being placed in service, recapture may be triggered. 

Taxpayers should evaluate anticipated holding periods and potential operational changes before making the election. 

Safe Harbor for Certain 2025 Placements in Service 

Notice 2026-16 provides a safe harbor for property placed-in-service between July 5, 2025, and December 31, 2025. 

A taxpayer’s activity will automatically be treated as a QPA if the applicable business activity code falls within: 

• NAICS Sectors 31–33 (Manufacturing) 
• NAICS Subsectors 111–112 (Agriculture) 

Planning Considerations 

Given the technical and fact-specific nature of QPP, taxpayers and advisors should consider: 

• Construction and acquisition timing relative to statutory deadlines 
• Documentation supporting substantial transformation 
• Ownership structures in lease scenarios 
• Allocation methodologies for mixed-use properties 
• Long-term holding and recapture risk 

Notice 2026-16 provides meaningful clarification but also introduces compliance and tax considerations that require careful yet timely analysis. The EisnerAmper team is available to assist taxpayers in evaluating the applicability of QPP. Contact a member of our team today to get proper guidance for optimal application under Notice 2026-16.