Qualified Production Property: Manufacturing Building Deduction

By AE Tax Advisors Team · Updated November 6, 2026

A different question from ordinary equipment bonus depreciation

Section 168(n) allows an elective 100% depreciation allowance for qualifying production property. For a manufacturing owner who also owns the factory, it can change the analysis of eligible nonresidential real property rather than merely accelerating equipment costs. It is not a blanket deduction for any warehouse, commercial building or property leased to a manufacturer.

This guide uses IRS Notice 2026-16 and distinguishes the building review from ordinary owner-occupied cost segregation. Confirm current guidance and the property's complete facts before making an election.

Start with the eligibility gates

The relevant property or portion must be qualifying nonresidential real property subject to MACRS, located in the United States or a U.S. territory.
It must be used as an integral part of a qualified manufacturing, production or refining activity. The production activity and qualified product definitions matter; a business name or industrial zoning designation is not enough.
Generally, original use must begin with the taxpayer and construction must begin after January 19, 2025 and before January 1, 2029.
Generally, it must be placed in service after July 4, 2025 and before January 1, 2031. The notice contains a limited disaster extension.
The property cannot be subject to ADS, and ineligible portions must be excluded.
The taxpayer must make the required election and designate the qualifying amount.

Dates are eligibility requirements, not a suggestion to rush a purchase. Preserve construction-start support and actual readiness-for-use records. A contract date, down payment or certificate alone may not establish every required fact.

Can a separate property LLC lease the factory to my company?

Lessors generally cannot count a tenant's production activity as their own for this test. Notice 2026-16 provides exceptions for intercompany leases within a consolidated group and for qualifying commonly controlled arrangements involving a partnership, S corporation or individual lessor. Review the precise ownership, attribution and timing conditions rather than treating every related lease as eligible.

The commonly controlled tests use 50% ownership thresholds and require the relevant ownership for a majority of the service year, including its final day. That is a different analysis from passive-activity grouping or QBI aggregation. A change in ownership or tenant activity can also create a later recapture issue. Supply the full ownership chart and lease history, not just the LLC names.

Factory floor, offices and finished-goods storage

Identify how each portion of the building is used. Offices, administrative areas, parking, sales, lodging, research, software development and engineering areas are among the specified exclusions. Finished-product storage and other excluded activities need separate treatment. Allocating all building basis to production simply because most employees work there is not supported.

The notice permits reasonable, consistent allocation methods using evidence such as floor area, engineering plans, cost-segregation data and invoices. Employee headcount or employee time is not a reasonable basis-allocation method under the notice. Dual-use systems require an allocation that reflects actual or planned use. The 95% de minimis election addresses the integral-part test; it does not erase the separate exclusions for ineligible property.

What about a used building?

A limited rule can treat the original-use and construction-start conditions as met for qualifying used property acquired after January 19, 2025 and before January 1, 2029. Among other requirements, the building must not have been used in a qualified production activity by any person from January 1, 2021 through May 12, 2025, tested without regard to whether the activity resulted in substantial transformation, and must not previously have been used by the taxpayer. Purchase, related-party and basis requirements also apply. Obtain historical-use evidence before assuming a secondhand factory qualifies.

Coordinate QPP, cost segregation and the asset ledger

QPP under Section 168(n), bonus depreciation under Section 168(k) and qualified improvement property are different concepts. A cost-seg study can help support allocations but does not substitute for QPP eligibility or election work. Separate equipment, land, eligible building portions and excluded space in a reconciled schedule. Do not deduct the same basis twice.

Model owner-level loss limitations and state conformity as well as the federal allowance. The election can designate a specific eligible amount rather than necessarily all eligible basis. Compare current and later-year effects before electing; revocation generally requires IRS consent under the notice and is not a routine annual choice.

Keep the ten-year use-change issue in the plan

A qualifying change in use within the notice's ten-calendar-year period can trigger ordinary-income recapture. Leasing changes, moving production, changing common control or converting space to another use therefore belong in the analysis. The notice distinguishes temporarily idle property from disqualifying changes. A later sale also needs its own disposition review.

Pre-construction or acquisition review packet

Buyer and tenant tax classifications, ownership history and leases.
Description of products, transformation processes and actual building uses.
Construction timeline, contracts, invoices and planned service date.
Floor plans identifying production, administration, storage and shared infrastructure.
Prior-use evidence for used property and a reconciled basis allocation.
Election responsibility, federal/state projections and an annual use-change review.

Questions business owners ask

Does Section 168(n) let me deduct an entire factory?

Only the eligible amount properly designated under the election. Mixed-use areas, excluded functions, property dates and other requirements can limit the result.

Is a warehouse automatically qualified production property?

No. Determine the activities conducted in the property and the notice’s integral-use and exclusion rules. Finished-goods storage alone is not a qualified production activity.

Can related business and property LLCs qualify?

A qualifying commonly controlled lease may fall within an exception, but the lessor classification, ownership, attribution and timing requirements must be checked. It is not automatic.

Coordinate the business, property and household return

Bring the ownership chart, relevant returns, property depreciation schedules and the decision deadline to a discovery call. Ask for a written scope identifying planning, implementation, return preparation and study responsibilities. These services are separately scoped; a public article is not a completed plan for your facts.

Fees and engagement scope · Discuss your business and real estate

Sources and review context

General educational information prepared with AI assistance, not an individual tax opinion or a representation of professional signoff. Examples are hypothetical and do not represent client results. Verify the rules for the applicable year and state with your tax advisor before acting. Editorial policy · AI disclosure