Section 168(n) Qualified Production Property: 100% First-Year Depreciation on New Factories

Section 168(n) is a new subsection of the tax code that gives a manufacturer, refiner, or agricultural producer a one-shot chance to write off the cost of a new production building in the year it opens. The Internal Revenue Bulletin describes the provision as being added by "§ 70307 of Public Law 119-21, 139 Stat. 72 (July 4, 2025), commonly known as the One, Big, Beautiful Bill Act (OBBBA)".^[11] By election, the deduction for the year the property is placed in service "includes an allowance equal to 100 percent of the adjusted basis of the qualified production property".^[12]

The rule is narrow on purpose. It does not apply to warehouses that only store finished goods, to the corporate headquarters that sits next to the plant, or to a leased building where the landlord is not the one running the qualified activity. It applies to the physical space in which a taxpayer is actually manufacturing, producing, or refining a qualified product, and it is available only for a defined window of construction and placed-in-service dates that the next sections walk through.

The IRS defines a qualified production activity as "manufacturing, chemical production, agricultural production, or refining activity that results in the substantial transformation of the property comprising a qualified product".^[3] That list is short and deliberate. A retail store, a professional services firm, a data center that only runs software, and a hospitality operator are all outside the rule even if they build brand-new nonresidential space. A steel fabricator, a food processor, a pharmaceutical maker, a fertilizer plant, an oil refiner, and a working farm can all be inside it, provided the space is actually used for the qualifying activity.

A qualified product is any tangible personal property, with one carve-out: food or beverage prepared in the same building as a retail establishment that sells it does not count. In other words, a stand-alone bakery that supplies grocery chains can qualify, while a coffee-shop counter that bakes its own croissants for sale on the spot cannot. If you are building or expanding a production facility and want the depreciation to line up with a return, our business tax return preparation and advisory solutions cover the entity-side planning and the return preparation together.

The substantial transformation test is what pushes an activity from routine handling into a qualified production activity. The Internal Revenue Bulletin defines it as "the further manufacturing, production, or refining of the constituent elements, raw materials, inputs, or subcomponents into a final, complete, and distinct item of property" that is fundamentally different from the original inputs.^[15] The IRS lists three plain examples: "the conversion of wood pulp to paper, steel rods to screws and bolts, and freshly caught tuna fish to canned tuna".^[16] Packaging finished goods, assembling gift baskets, and bundling subscription boxes are given as counter-examples that do not clear the bar.

Essential activities that do not themselves transform the product can still ride with the qualified activity, so long as they occur inside the same property or integrated facility and are required for the transformation to reach the intended quality or quantity. Receiving and storing raw materials is treated as essential; storing the finished goods is not.

Section 168(n) rides on two overlapping timing windows that a project must satisfy at the same time. The IRS depreciation guide states that eligible property must be "Constructed beginning after January 19, 2025, and before January 1, 2029".^[5] The IRS newsroom release states that "the special depreciation allowance only applies to qualified production property placed in service after July 4, 2025, and before Jan. 1, 2031".^[2]

Missing either date drops the property out of the regime entirely. A plant whose construction began before the January 19, 2025 start date does not qualify, no matter when it opens. A plant whose construction begins on time but slips past January 1, 2031 to open after that date also does not qualify. That leaves the placed-in-service date, not the completion date, as the number to plan around. For a large project with a long construction runway, a build plan that overshoots either window loses the entire election in the year the property opens. Our advisory solutions team runs the placed-in-service timing against the CapEx plan before the contractor breaks ground.

The exclusion list is where projects most often lose part of the deduction. The Internal Revenue Bulletin sets it out in one sentence: "Section 168(n)(2)(C) provides that qualified production property does not include any portion of nonresidential real property that is used for offices, administrative services, lodging, parking, sales activities, research activities, software development or engineering activities, or other functions unrelated to the manufacturing, production, or refining of tangible personal property".^[9] The same rule reaches storage space for finished goods, which is not treated as an essential activity for the qualifying use.

In practice, a modern factory that includes an office wing, a QA lab, a company cafeteria, and a shipping-and-storage dock has to split the basis across those uses. The eligible portion is what actually houses the qualifying activity: making, refining, chemical production, or agricultural production. A taxpayer may use square footage, cost segregation data, engineering plans, process diagrams, or construction invoices to make that allocation, and a narrow de-minimis rule lets a building where the qualifying use dominates be treated as fully eligible, but a project that treats the office wing or the finished-goods warehouse as eligible will not survive a review.

Yes, but only under a narrow lookback rule. Under the interim guidance, a taxpayer that acquires used property is treated as its original user and as having begun construction inside the qualifying window if "the property was not used in a qualified production activity (determined without regard to whether such activity resulted in a substantial transformation of the property comprising the qualified product) by any person at any time during the period beginning on January 1, 2021, and ending on May 12, 2025".^[10] The acquiring taxpayer also must not have used the property before, and the purchase must satisfy the same anti-related-party and cost-basis rules that apply to Section 179 purchases.

The practical result is that a used building recently repurposed to a qualified activity is unlikely to qualify, because a prior owner probably used it that way inside the lookback. A used building that was formerly a warehouse, a distribution center, or a headquarters, and is now being retrofitted for manufacturing, is much more likely to fit. Cost segregation and title-history diligence do most of the work of proving the lookback.

The election is made property by property and it is not a check-the-box. The IRS depreciation guide states that to make the election and designation, a taxpayer must attach a statement to the timely filed return, including extensions, for the tax year in which the eligible property is placed in service, containing the information listed in section 7.02 of Notice 2026-16.^[7] The statement carries the property's address, its total unadjusted depreciable basis, the amount allocated to eligible property, and the dollar amount designated as qualified production property.

The finality of the choice is what makes it a planning issue rather than a filing task. The IRS states that the election and designation, once made, cannot be revoked except in extraordinary circumstances.^[8] A taxpayer who elects the deduction on a large basis and then changes the use of the building or exits the qualifying activity does not get to unwind the choice; instead the recapture rules covered below govern the result. That is why the underwriting for the election happens before, not after, the placed-in-service year. Our business tax return preparation engagements build the election statement inside the return itself.

The election has a long shadow. The IRS depreciation guide states plainly that if, within 10-calendar years of placing qualified production property in service, a taxpayer ceases using the property as an integral part of a qualified production activity and begins using it in another productive use, the taxpayer will generally recapture the entire allowance as ordinary income, even without disposing of the property.^[6] The recapture is not deferred, offset by a like-kind exchange, or diluted by the passage of time inside that window.

Temporarily idle property is not a change in use. If a taxpayer takes a plant offline for a production-line upgrade or facility-wide maintenance with the expectation of resuming, the clock does not restart. But converting the plant to a distribution center, leasing it to a business that is not in a qualified activity, or retrofitting for a use outside manufacturing, chemical production, agricultural production, or refining will each be a change in use that triggers ordinary-income recognition. A partial change in use, such as reallocating half of a factory's square footage to a non-qualifying purpose, triggers a proportional recapture.

Section 168(n) does not replace bonus depreciation or Section 179; it sits alongside them for a category the other two never reached. The IRS depreciation guide states that "P.L. 119-21, commonly known as the One Big Beautiful Bill Act, reinstated the 100% special depreciation allowance for certain qualified property acquired and placed in service after January 19, 2025".^[14] That bonus depreciation regime under Section 168(k) still applies to tangible personal property such as machinery and equipment, not to the building shell itself. Our companion post on the 100% bonus depreciation and Section 179 overview walks the equipment and vehicle side.

Section 179 is a separate election. The IRS states that "For tax years beginning in 2026, the maximum section 179 expense deduction is $2,560,000. This limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $4,090,000".^[13] Section 179 is a much smaller lever than Section 168(n) once a taxpayer is building nonresidential real property that houses a qualified production activity, but it remains useful for equipment inside that same facility. For a broader map of the depreciation and other business changes in the same law, see our the One Big Beautiful Bill tax changes guide.

The most important decisions on Section 168(n) get made before the property is placed in service, not after. That means confirming the qualifying activity, mapping the eligible and ineligible square footage of the plant, aligning the construction and placed-in-service dates with the two windows, and modelling the 10-calendar-year exposure to recapture if the use of the building may change. For a facility that will house a mix of manufacturing and back-office functions, the allocation methodology is what carries most of the audit risk, and the de-minimis rule is a narrow safety valve rather than a default.

An Enrolled Agent (EA) can quarterback that work with the general contractor, the cost segregation firm, and the operating team, and can build the election statement into the return that the deduction will ride on. If you are a construction firm or building owner on the delivery side, our construction + contracting tax help page describes how we work with contractors, developers, and owner-operators to keep tax planning aligned with the CapEx schedule.