The U.S. Department of the Treasury and IRS issued Notice 2026-16 regarding the special depreciation allowance for qualified production property (QPP) under Internal Revenue Code (IRC) Section 168(n). This new tax provision was added with the passage of the One Big Beautiful Bill Act (OB3) on July 4, 2025. This addition to the IRC temporarily provides a 100% depreciation deduction for certain nonresidential real property in the year it is placed in service. There are several requirements that must be met for the property to be qualified. This article expands on the fundamental provisions of QPP as outlined in our FORsights™ “Tax Act: 100% First-Year Depreciation Deduction for Real Property.”
Forvis Mazars Insight: As mentioned, the tax benefits are temporary—available for property beginning construction or acquired after January 19, 2025, and before January 1, 2029. The property must also be placed in service after July 4, 2025, and before January 1, 2031. Therefore, time is of the essence for taxpayers to take advantage of this opportunity.
What information does Notice 2026-16 provide or clarify?
The notice provides interim guidance while Treasury and the IRS work on proposed regulations. While some of the information provided in the notice follows the statute as written, the notice does provide additional details and clarification of their application including the following:
- Integral part requirement and de minimis rule
- Leased property and exceptions
- Special rule for certain used property not previously used in manufacturing
Forvis Mazars Insight: A taxpayer may rely on the guidance in this notice until final regulations are published in the Federal Register. Subscribe to our tax email list to receive our weekly publication “From the Hill” which provides updates as to when Treasury and the IRS publish guidance.
Integral Part Requirement & De Minimis Rule
A building (or a portion of a building) satisfies the “integral part requirement” only if a qualified production activity (QPA) is conducted in, or takes place within, the physical space of that property (or portion). If only part of the physical space houses the QPA, only that portion is treated as meeting the integral part requirement; the remainder is not integral and therefore not eligible QPP. The notice further requires the test to be applied at the unit-of-property1 level—each unit must satisfy the integral part requirement on its own—subject to a special integrated-facility rule that can allow combined testing solely for this requirement.
Where a property includes both eligible and ineligible space, the notice permits taxpayers to allocate the property’s unadjusted depreciable basis between eligible and ineligible portions using any reasonable method, and it provides examples of methods that may be reasonable, including square footage, cost segregation data, architectural or engineering plans, process diagrams, and invoices.
A taxpayer may treat an entire property as satisfying the integral part requirement under an elective de minimis rule if 95% or more of the property’s physical space satisfies that requirement at the time the property is placed in service. The election is made by including a specific declaration within the taxpayer’s election statement.
The notice allows the taxpayer to designate either the entire unadjusted depreciable basis of the eligible portion as QPP, or a specific dollar amount of eligible basis (not exceeding the eligible basis) as QPP. The designated dollar amount must be stated in the taxpayer’s election statement. If the election statement does not specify a dollar amount, it is treated as designating the entire eligible basis as QPP.
Forvis Mazars Insight: A cost segregation analysis may not only help in determining assets within an eligible or ineligible space, but also in determining other assets that may be eligible for bonus depreciation if they are not eligible for the §168(n) special depreciation allowance described in this article.
The ability to designate a specific dollar amount of eligible basis may help taxpayers to preserve net operating losses, manage state conformity issues, spread out depreciation deductions to future years, or other strategic tax planning opportunities.
Leased Property & Exceptions
As a general rule, the notice provides that if the taxpayer is a lessor, property used by a lessee in a QPA is not treated as used by the taxpayer as an integral part of a QPA; accordingly, the lessor fails the integral part requirement and cannot treat the leased property as QPP. The notice creates two exceptions to the general leased-property disallowance.
First, for consolidated groups,2 where one member owns and leases property to another member under an intercompany lease, the notice treats the consolidated group as a single taxpayer for purposes of the integral part test and provides that the lessor is not treated as a “lessor” for this purpose; thus, eligibility is evaluated by the lessor in reference to lessee’s QPA conducted in the leased property.
Second, for leasing involving commonly controlled pass-through entities (partnerships or S corporations) or individuals, the notice similarly disregards “lessor” status for purposes of the integral part requirement, provided the lessee is a “commonly controlled person” meeting specified 50% ownership or attribution thresholds3 across the relevant taxable year.
Special Rule for Certain Used Property
Certain used property may satisfy the otherwise strict “original use” and “beginning of construction” requirements through a special rule. Specifically, used property acquired after January 19, 2025, and before January 1, 2029, may be treated as meeting those requirements if:
- The property was not used in a QPA by any person during the period January 1, 2021, through May 12, 2025 (determined without regard to whether the prior activity substantially transformed the qualified product),
- The taxpayer or a related party did not use the property prior to acquisition, and
- The acquisition satisfies purchase and cost requirements cross-referenced to §179 and related regulations.
The notice further provides that taxpayers determine the acquisition date and related used-property timing requirements under rules consistent with the §168(k) regime.
How Forvis Mazars Can Help
This new special depreciation allowance for qualified nonresidential property may be a benefit to taxpayers that qualify. Contact a professional at Forvis Mazars to learn more about how you can take advantage of this opportunity.