Qualified Production Property 100% Depreciation and the 95% Floor Plan Rule.
A new plant is 39-year property, so a $10,000,000 building opened in July 2026 buys a $117,700 deduction. IRC §168(n) turns the production floor into a year-one write-off, and the office wing is what you have to carve out.
A contract manufacturer breaks ground in 2025 on a $10,000,000 plant and books the building as a 39-year asset, because that is what a building has always been. Opened in July 2026, that is a $117,700 deduction in the first year. The production floor of the same building is qualified production property, and 100% depreciation on it is available the year the plant opens, which turns $117,700 into $8,814,124. What separates the two numbers is an election and a floor plan.
Why a new plant is normally a 39-year deduction.
Nonresidential real property is depreciated straight line over 39 years, with a mid-month convention. Bonus depreciation has never reached the shell of a new building. It reaches the personal property and land improvements inside the project, the process piping and the specialty electrical, which is most of why cost segregation studies exist. §168(n) is the first provision that reaches the concrete and the steel of a new building, and the first one with a floor plan test, which is what separates it from the 100% bonus depreciation rules you already know.
What qualified production property 100% depreciation covers.
Qualified production property is the portion of nonresidential real property used by the taxpayer as an integral part of a qualified production activity, under §168(n)(2)(A). A qualified production activity is the manufacturing, production, or refining of a qualified product that results in a substantial transformation of the property comprising that product, under §168(n)(2)(D).
Two definitions narrow that hard. "Production" does not mean what it means in ordinary business English: §168(n)(2)(E) limits it to agricultural production and chemical production, so a film studio and a data center produce nothing for this purpose. And a "qualified product" is tangible personal property under §168(n)(2)(F), excluding food or beverage prepared in the same building as the retail establishment that sells it. A brewery that ships kegs qualifies. The brewpub attached to it does not.
Notice 2026-16, the interim guidance Treasury issued on February 20, 2026, defines substantial transformation as processing raw materials or subcomponents into a final, complete, and distinct item that is fundamentally different from what went in. Assembly counts. Sorting, packaging, and relabeling do not.
Four dates, and a project that misses one gets nothing.
- Construction begins after January 19, 2025. Notice 2026-16 measures the start with the familiar tests: physical work of a significant nature, meaning foundations and structural steel, or a 10% cost safe harbor. Design, permitting, and financing are not physical work, so 2024 drawings do not disqualify a project.
- Construction begins before January 1, 2029.
- The building is placed in service (ready and available for its assigned function) after July 4, 2025, the day the OBBBA was signed.
- The building is placed in service before January 1, 2031. This is the one that bites: a project breaking ground in late 2028 has two years to open.
An existing building can qualify too. §168(n)(2)(B)(i) treats a buyer as the original user if the property is acquired after January 19, 2025 and before January 1, 2029 and was not used in a qualified production activity by anyone between January 1, 2021 and May 12, 2025. A shuttered distribution center converted to a production line is in bounds. A competitor's working plant is not.
- Building cost, excluding land
- $10,000,000
- Production floor, 88% of the square footage
- $8,800,000
- Office, sales, and administrative space, 12%
- $1,200,000
- First-year depreciation with no election, 39-year straight line
- $117,700
- §168(n) deduction on the production floor
- $8,800,000
- First-year depreciation on the remaining $1,200,000
- $14,124
- First-year deduction with the election
- $8,814,124
- Added first-year deduction
- $8,696,424
- Federal tax deferred at 37%
- $3,217,677
Tax year 2026. The plant is placed in service in July, so the first-year rate for 39-year nonresidential real property under the mid-month convention is 1.177%, from Table A-7a of IRS Publication 946. Land is excluded because land is not depreciable, and so are the personal property and land improvements a cost segregation study would separate out, which are already eligible for 100% bonus depreciation under IRC §168(k). Assumes a pass-through owner in the 37% federal bracket with enough other income to absorb the deduction, no state income tax, and no limitation under IRC §461(l). The tax is deferred, not forgiven: the building's basis drops to $1,200,000, and the recapture rules of IRC §168(n)(5)(A) and IRC §1245 apply on a disposition.
Read that as timing, not free money. You are trading 39 years of $225,641 deductions for one year of $8,800,000, and the plant's basis goes to almost nothing, which makes a sale inside the recapture window expensive.
The 95% rule and the space that does not count.
§168(n)(2)(C) excludes any portion of the property used for offices, administrative services, lodging, parking, sales activities, research activities, or software development or engineering activities. Storage of finished product is out as well. Storage of raw materials feeding the line can be in, because Notice 2026-16 treats activities essential to completing the production activity as part of it.
A mixed-use building gets allocated by a reasonable method, usually square footage or the cost segregation data you were going to buy anyway. Then comes the rule worth designing around: if 95% or more of the physical space satisfies the integral part test when the building is placed in service, Notice 2026-16 lets you elect to treat the entire building as qualified production property. On the $10,000,000 plant above, moving the office wing from 12% of the square footage to 4% takes the first-year deduction from $8,814,124 to the full $10,000,000. That is $1,185,876 more, and exactly a third of it, $395,292, comes from the de minimis election itself. That is an architect conversation, and it has to happen before the drawings are final.
Who assumes they qualify and does not.
Landlords, mostly. The statute requires the property to be used by the taxpayer, and Notice 2026-16 says a lessor whose tenant runs the production activity fails the integral part test. One exception matters: where lessor and lessee are under common control, generally more than 50% ownership, the tenant's activity is attributed to the owner. The ordinary operating-company-plus-real-estate-LLC structure survives that. A third-party industrial landlord does not.
The second trap is at the bottom of the return. An $8,800,000 deduction against less income than that does not disappear, but it does get held up. The excess business loss limitation of §461(l) caps a noncorporate taxpayer's business loss at $256,000, or $512,000 on a joint return, for 2026, and the rest carries forward as a net operating loss usable against 80% of later income. Run the projection before you spend the refund.
One statement, ten years of strings.
The election is specific. Notice 2026-16 wants a statement attached to a timely filed original return, including extensions, for the year the property is placed in service, identifying the property and the dollar amount of basis claimed as qualified production property. A number on Form 4562 by itself does not do it. §168(n)(6)(B) then makes the election, and the amounts specified in it, irrevocable without the Secretary's consent.
After that the building carries a ten-year leash. Under §168(n)(5)(A), if it stops being used as an integral part of a qualified production activity and goes to another productive use within ten years of being placed in service, you are treated as having disposed of it and the deduction comes back as ordinary income under §1245. Moving from one qualified production activity to another does not trigger it, and neither does idling the line temporarily when you intend to restart. Leasing the plant out or turning it into a warehouse does.
