Provisions within the One Big Beautiful Bill Act (OB3) aim to support domestic energy production and refining facilities, whether related to clean energy credits, bonus depreciation, and/or other items. One of the more significant impacts on the oil and gas industry, however, is the 100% deduction for qualified production property (QPP). This deduction applies to refining and production facilities that normally don’t qualify for immediate expensing. Generally available to those owning and constructing manufacturing, production, or refining facilities, Notice 2026-16 (the notice) was recently issued to clarify QPP rules related to the deduction in anticipation of forthcoming regulations.
Qualified Production Activities (QPA) Defined
The notice clarifies which manufacturing, refining, and production facilities are eligible for the QPP deduction. Per the notice, refining for this purpose is defined as “purify[ing] a substance into a useful and higher-value product,” including “processing petroleum, liquid hydrocarbons, and other products from crude oil by using fractionation, straight distillation of crude oil, and/or cracking.” In addition, the notice clarifies that chemical production includes:
- Petrochemical manufacturing
- Industrial gas manufacturing
- Cyclic crude manufacturing
These activities must be either “essential” to the completion of the QPA or result in the “substantial transformation” of property. While substantial transformation has been a more historically established concept (such as in the realm of Subpart F, tariffs, or the old Domestic Production Activities Deduction), the notice clarifies the term “essential activities.” The definition includes activities conducted in the same location as activities meeting the “substantial transformation” threshold, and that without which the end product would be either a different quality or quantity. In addition, storage of raw materials for use in a QPA qualifies as “essential,” even though storage of the finished product does not.
Activities that meet neither the “essential” nor “substantial transformation” definitions are administrative or support type activities, namely: “property used for offices, administrative services, lodging, parking, sales activities, research activities, software development or engineering activities, or other functions unrelated to a QPA.”
QPA Eligibility Clarifications
Most refineries tend to own their end products. However, activities can qualify as QPAs if the taxpayer refines their own products or if they act as the refiner of products owned by others. That being said, the taxpayer’s trade or business must be the QPA, and they must own the property for which the deduction is taken. In short, the taxpayer generally cannot qualify for the deduction by leasing their property to a producer or refiner. However, the notice addresses limited exceptions where leases among members of consolidated groups and commonly controlled pass-through entities may qualify. For both, the rules disregard “lessor” status and instead look to the lessee’s activity for qualification when certain requirements are met.
Used Property Guidelines
In general, eligible property must have “original use,” beginning with the taxpayer claiming the deduction. This limits deduction availability normally to the construction or expansion of QPA facilities rather than the purchase of already (and recently) operational facilities. However, for used property acquired after January 19, 2025 and before January 1, 2029, the notice clarifies that used property may qualify if:
- The property was not used in a manufacturing activity by any person during the period January 1, 2021 through May 12, 2025.
- The taxpayer or a related party did not use the property prior to acquisition.
- The acquisition satisfies purchase and cost requirements cross-referenced to Section 179 and related regulations.
International Energy Agency (IEA) Insights
According to the IEA, the pace of growth for refining distillation capacity has slowed.1 They indicate that the “striking slowdown in demand growth for refined products weighs heavily on investments in refining capacity.” Coupled with increased construction costs due to tariff pressures, this raises the question: Is the QPP deduction set to be as effective as intended? The IEA also acknowledges that some refiners may opt to sell their facility if planned maintenance shutdowns are too costly or if capital expenditures required for complying with emission limits are too high. Based on the guidance included in the notice, the QPP deduction would likely not be available to the purchasers of these facilities, assuming QPA activity had occurred in the facility within the past four years.
OB3 also implemented changes to the §45Z clean fuel production credit. For those refiners expanding into sustainable aviation fuel (SAF), building out facilities to accommodate this biofuel co-processing could qualify for the QPP deduction, assuming requirements are met as outlined in the notice.
How Forvis Mazars Can Help
We understand you experience constant change, including globalization, technological advances, economic shifts, and new laws and regulations, which can create challenges. To help you navigate this uncertainty, our experienced Tax team is committed to delivering an Unmatched Client Experience® through our suite of tax compliance and consulting services. For questions about whether your activity could qualify for the QPP deduction or other related OB3 tax planning strategies, reach out to a professional at Forvis Mazars today.
- 1“Oil 2025: Analysis and forecast to 2030,” iea.org, June 17, 2025.