The Internal Revenue Service (IRS) and the Department of the Treasury issued Notice 2026-16, an interim guidance document that establishes the operating parameters for applying a special 100% depreciation deduction on qualified production property (QPP).
This benefit was incorporated into the tax code through the One Big Beautiful Bill Act (OBBBA), enacted on July 4, 2025, under Section 168(n) of the Internal Revenue Code. The notice allows businesses to operate under these rules immediately, without waiting for formal regulations to be published.
IRS Draws the Line on Who Gets the 100% Deduction
The measure addresses an interpretive gap that existed since the law’s approval. Although the statute established the benefit, the technical details necessary to claim it remained undefined. The notification covers definitions, deadlines, selection procedures, and the handling of special cases, providing taxpayers with a framework applicable from now on.
The Treasury and the IRS confirmed that they will publish additional proposed regulations to expand and clarify the rules. While that process is underway, companies can rely on the interim guidance without incurring regulatory risk.
IRS Defines What Counts as Real Transformation — and What Doesn’t
The deduction applies to non-residential real estate—structures such as factory buildings—that function as an integral part of a qualifying production activity. It does not cover separate equipment or machinery; the focus is on the physical construction of the property.
To qualify, construction of the property must have begun after January 19, 2025, and before January 1, 2029, and the property must be in service between July 4, 2025, and December 31, 2030.
Within this timeframe, the taxpayer can immediately deduct up to 100% of the unadjusted depreciable base of the asset in the year it is put into operation, instead of distributing that deduction over decades under the conventional MACRS system. The mechanism is not automatic: the taxpayer must make an explicit choice to have the property treated as a QPP (Qualifying Production Property). Failure to do so prevents access to the benefit.
Activities that enable the use of the property as QPP include manufacturing, chemical production, agricultural production and refining, provided that the result is a substantial transformation of the inputs into a different and finished product.
The Standard of Substantial Transformation and Its Implications
One of the central contributions of the Notification 2026-16 is the operational definition of “substantial transformation“. According to the IRS, the term refers to the processing of constituent elements, raw materials, or subcomponents into a final product that is fundamentally different from the original inputs. The organization illustrates the concept with concrete examples: the conversion of wood pulp into paper, steel rods into screws and bolts, or fresh tuna into canned tuna.
The notification includes a de minimis rule aimed at simplifying the application in properties with partially unclassified use. If 95% or more of the physical space of a property meets the integral part requirement upon entering service, the taxpayer may choose to treat the entire property as qualifying. This prevents smaller spaces used for administrative or auxiliary purposes within a production facility from disqualifying the entire benefit.
For mixed-use properties where the qualifying proportion does not reach that threshold, the notice establishes procedures for allocating a base between qualifying and non-qualifying portions. It also regulates situations involving related party leases and dual-use infrastructure, cases that the original text of the law did not address with sufficient precision.
If you believe your business qualifies for these deductions, contact your trusted accountant or tax advisor right away to help you file your next tax return correctly.
