Recent guidance issued on depreciation rules have introduced significant planning considerations(Opens a new window) for businesses investing in fixed assets and facility construction. With the reinstatement of 100% bonus depreciation and new guidance surrounding Qualified Production Property, fixed asset analyses and cost segregation strategies require renewed attention. Proper timing, analysis, and classification of assets are now central to maximizing available deductions while mitigating compliance risk.

Reinstated 100% bonus depreciation: A two-prong test

The return of 100% bonus depreciation presents a substantial opportunity for taxpayers making capital investments. However, eligibility for the 100% bonus depreciation made available by the enactment of the One Big Beautiful Bill Act (OBBBA) requires a thorough analysis that many taxpayers should be mindful of. The IRS and Treasury recently issued Notice 2026-11   (Notice), providing taxpayers with guidance as it relates to 100% bonus eligibility under OBBBA.

To qualify for 100% bonus depreciation, the Notice clarifies that the property must satisfy two distinct requirements:

1. The property must be acquired after Jan. 19, 2025, and

2. The property must be placed in service after Jan. 19, 2025

This two-pronged requirement has reintroduced a critical timing analysis that, in practice, had received less attention in recent years. For example, a facility that satisfies the placed in-service date requirement does not automatically qualify for 100% bonus depreciation if the acquisition date is not satisfied. If either the acquisition date or the placed-in-service date requirement is not met, the property reverts to the bonus rates as established under prior law (i.e., 40% for property placed in service in 2025, 20% for property placed in service in 2026).

For businesses with significant capital expenditures, this distinction may materially affect projected depreciation outcomes and have a significant impact on taxable income.

Defining the acquisition date

The determination of the proper acquisition date depends on the nature of the property. For an existing item or property that is purchased from a third party, the date of acquisition is determined by reference to the date on which a written binding contract is signed, and all contingencies have been satisfied.

For constructed property, whether self-constructed or built by a third-party on the taxpayer’s behalf, the determination of the acquisition date shifts to the construction timing. In these cases, the acquisition date is deemed to occur when construction, manufacture, or production of the item begins. Importantly, construction is considered to begin when work of a significant physical nature starts, which excludes certain preliminary activities. Preliminary activities that are excluded for purposes of determining when work of a significant physical nature begins include (but are not limited to): project planning, design work, securing financing, and general site clearing. However, construction is deemed to begin when physical work directly related to the structure commences, such as excavation for the building’s footings or foundation work.

These requirements may push acquisition dates later than anticipated, which can be beneficial in projects seeking to satisfy the threshold for 100% bonus eligibility.

The 10% safe harbor election

Recognizing the complexity of determining the exact start of physical construction, recent IRS guidance reminds taxpayers of a 10% safe harbor election available for determination of the acquisition date for constructed property. Under this safe harbor, construction is deemed to begin when 10% of the total project cost has been incurred. This election allows taxpayers to aggregate qualifying costs and potentially position the acquisition date more favorably relative to the  threshold required for 100% bonus eligibility. For construction projects that began near the end of 2024, this safe harbor may provide an opportunity to qualify for 100% bonus depreciation where a strict physical-work test would not otherwise be met.

Qualified Production Property: Taking advantage of the opportunity

Beyond property that may be eligible for bonus depreciation, new provision Section 168(n) introduces the ability to deduct 100% percent of certain building-related costs if classified as Qualified Production Property (QPP). This represents a significant shift from the existing treatment of such property. Historically, non-residential real property has been classified as an asset with a 39-year life, which was ineligible for bonus depreciation. Under the updated framework, manufacturing facilities (or portions thereof) may qualify for 100% depreciation if specific requirements are met.

Key conditions include:

• The property must be non-residential real property
• The property must be in the United States
• Original use must begin with the taxpayer
• The property must be used in a qualified production activity (QPA)
• Construction must begin after Jan. 19, 2025, and before Jan. 1, 2029
• The property must be placed in service before Jan. 1, 2031

Carving out non-manufacturing space

An important limitation is that only portions of a facility used as an integral part of a qualified production activity will be eligible for treatment as QPP. A qualified production activity is defined as manufacturing, production, or refining activities with substantial transformation. Accordingly, costs related to areas of a facility that are utilized for administrative activities, sales efforts, research and development, software development, or the holding of finished goods are excluded. This is where cost segregation becomes essential.

Traditional cost segregation studies seek to identify and isolate shorter-lived personal property from 39-year building components. Under the new rules, an additional layer of analysis is required for taxpayers seeking to benefit from the 100% deductibility afforded via treatment as QPP. After identifying the 39-year property, taxpayers must further analyze which portions are attributable to manufacturing, production, or refining operations versus those unrelated to such activities.

This refinement increases the technical rigor required in cost segregation studies and may significantly affect the amount eligible for accelerated depreciation for property that can be classified as qualified production property.

Long-term use requirement and recapture risk

One key consideration is that an election to treat property as QPP effectively carries a 10-year use requirement. Specifically, any property classified as QPP must continue to be used in the performance of qualified production activities (i.e., manufacturing) for 10 years from the placed-in-service date. If the manufacturing use ceases within that period, the QPP deduction may be recaptured. The cessation of qualified production activity is deemed a change in use, whereby the property is treated as disposed of at the date the manufacturing stops, potentially triggering ordinary income recapture.

Accordingly, facility planning must account not only for current operations but also for long-term operational intent.

Considerations for 2025 and beyond

With 100% bonus depreciation reinstated and expanded opportunities for manufacturing facilities, fixed asset planning now requires a coordinated approach to timing, documentation, and classification analysis.

Businesses should evaluate:

• Contract execution dates relative to acquisition thresholds
• Construction progress timing
• Consideration of the 10% safe harbor election for constructed property
• Interaction between cost segregation results and Qualified Production Property eligibility
• Proper identification of manufacturing versus non-manufacturing space of QPP
• Long-term operational plans to mitigate recapture exposure

While the return of 100% bonus depreciation may appear straightforward, the reemphasis on acquisition timing and eligibility requirements introduces complexity that should not be overlooked. Cost segregation strategies remain a powerful tool in accelerating deductions. However, under the updated framework, they now require a more granular review of facility components, construction timing, and the property’s usage towards administrative versus manufacturing activities. Proper planning and documentation will be central to capturing available benefits while maintaining compliance in 2025 and beyond.

To learn more about the details of the new deduction for Qualified Production Property along with the recent guidance, review our recent article: Additional Guidance on Section 168(n) - Qualified Production Property

For an even deeper dive into how to unlock value through cost segregation as well as R&D tax credits, Section 174, and fixed asset planning, watch our webinar: Unlocking value through R&D tax credits, Section 174, and fixed asset planning(Opens a new window)