Section 168(n), enacted as part of the One Big Beautiful Bill Act (OBBB), provides a targeted incentive intended to encourage domestic manufacturing and production investment through accelerated cost recovery for certain nonresidential real property. The provision introduces the concept of “qualified production property” (QPP), which generally consists of newly constructed or acquired nonresidential real property that is used as an integral part of a taxpayer’s qualified production activity (QPA). To qualify, construction must begin after Jan. 19, 2025 and before Jan. 1, 2029, with the property placed in service after July 4, 2025 and before Jan. 1, 2031. QPP must be modified accelerated cost recovery system (MACRS) property, located in the United States, and not otherwise subject to the alternative depreciation system (ADS) or treated as ineligible property.

Key clarifications in Notice 2026-16

On Feb. 20, 2026, Treasury released Notice 2026‑16, providing interim guidance on the interpretation and application of Section 168(n). The Notice addresses core definitional concepts, including what constitutes QPP and QPA, how units of property are determined, and when property is treated as used as an “integral part” of a qualifying activity. Each building and its structural components are treated as a single unit of property, while improvements or additions are separate units unless the properties operate together as an integrated facility. 

The Notice also introduces a de minimis rule under which a taxpayer may treat an entire property as QPP if 95% or more of the physical space is used in qualifying production activities, provided the election is properly made.

The clarification that improvements or additions are separate units of property (unless the properties operate together as an integrated facility) is an important one for taxpayers who may have purchased a facility previously used in production activities. Under Section 168(n), buildings acquired between Jan. 20, 2025 and Dec. 31, 2028, that were used in production activities between Jan. 1, 2021 and May 12, 2025, do not qualify for the QPP deduction. By clarifying that improvements or additions are separate units of property from the building itself, the Notice allows for acquirers of these facilities to enlarge the footprint of the facility or make improvements to the property and, provided all other criteria are met, receive the benefit of the QPP deduction for those enhancements. 

The Notice further clarifies that QPA is limited to manufacturing, production, or refining activities that result in a substantial transformation of tangible personal property. Certain activities (e.g., storage of raw materials, ingredient preparation, and oversight of manufacturing operations), may be treated as essential or related activities and therefore included in QPA if conducted within qualifying property. Conversely, offices, administrative functions, research, software development, sales activities, and storage of finished goods are expressly identified as ineligible uses. Where property includes both eligible and ineligible uses, taxpayers must allocate basis using a reasonable method, such as square footage or cost segregation, while headcount is specifically identified as an unreasonable allocation methodology.

For example, assume a taxpayer has a 100,000 square foot building, 60,000 of which is dedicated to qualified production activities, and 40,000 is designated as general administrative, sales, and other nonqualified activities. The taxpayer has 100 employees, with 70 being devoted to qualified production activities and 30 employees dedicated to administrative, sales, and other nonqualified activities. The Notice requires that the taxpayer use the square footage to determine the allocable portion of the facility eligible for QPP, which would result in 60% of the facility being eligible for QPP, and expressly forbids the headcount allocation that would otherwise produce a more favorable 70% of the facility being eligible for QPP.

A key component of Section 168(n) and QPP is that only those who own the facility in which QPA takes place and also perform those activities may take advantage of the deduction. This provision prohibits a lessor of a facility from claiming the QPP deduction if it is not also performing the QPA within the facility. The Notice provides for an exception to this rule for commonly controlled pass-through entities. Under the Notice, if a lessor of a facility in which QPA occurs is a related party via a greater than 50% ownership, either directly or by attribution under Section 267(b) or 707(b), to the taxpayer performing QPA within the facility, then the lessor is eligible to claim the QPP deduction on its tax return. This is a significant addition not found in the original Section 168(n) provisions within OBBB.

What does CohnReznick think?

Taxpayers should expect increased scrutiny around identifying qualifying production activities, delineating eligible versus ineligible space, and documenting allocation methodologies and elections. The election to treat property (or a portion thereof) as QPP must be made timely with the original return for the placed‑in‑service year and cannot be made retroactively. Additionally, the 10‑year change‑in‑use recapture rule elevates the importance of documenting anticipated property use at the outset. As a result, early identification of potentially qualifying projects and proactive internal consultation will be critical to managing both compliance and risk under Section 168(n).

For further guidance on Section 168(n), Notice 2026-16, or other fixed asset related matters, please contact your tax advisor.