Manufacturing
Plants and production facilities
New plants, expansions and additions whose construction began in the window. Manufacturing and production
Qualified Production Property Studies
The 2025 law lets manufacturers and other producers deduct the production portion of a qualifying building in the year it is placed in service. Getting there takes a study that separates the production floor from everything else, and we are one of the only firms in the USA that can do a Production Property Study.
The production building itself, in year one.
Bonus depreciation has never reached the building. A manufacturing plant's structure sat in a 39-year life no matter how much of it existed only to house the line. The 2025 law changed that for qualified production property: under IRC §168(n), the production portion of a qualifying building can be deducted in the year it is placed in service.
The IRS issued interim guidance in Notice 2026-16. The requirements are specific, and the election is made property by property on the original return.
We are one of the only firms in the USA that can do a Production Property Study.
Does the building qualify?§168(n), Notice 2026-16
Nonresidential real property
The building, or the portion of it, is nonresidential real property.
Used by you in a qualified production activity
Used by the taxpayer as an integral part of manufacturing, production (limited to agricultural and chemical production) or refining of a qualified product, with a substantial transformation of the inputs.
Original use begins with you
Original use must commence with the taxpayer. A limited rule covers acquired property that was not used in a qualified production activity between January 1, 2021 and May 12, 2025.
Construction begins in the window
Construction begins after January 19, 2025 and before January 1, 2029.
Placed in service in time, in the United States
Placed in service in the United States or a U.S. territory, after July 4, 2025 and before January 1, 2031.
Elected on the original return
Designated by a statement attached to the original federal return for the year the property is placed in service.
Summary of the requirements; the facts of each property and taxpayer decide eligibility. Confirm with your CPA.
Production floor on one side, everything else on the other
Only the portion of the building where the qualified production activity takes place is eligible. Notice 2026-16 names cost segregation data and engineering plans among the reasonable ways to allocate basis between the two.
Allocating a plant's basisEligible and ineligible portions
Eligible
- Space where manufacturing, production or refining takes place
- Portions used as an integral part of that activity
Not eligible
- Offices and administrative services
- Lodging and parking
- Sales activities
- Research, software development and engineering
- Other functions unrelated to production
The 5-, 7- and 15-year property inside the building is identified as it would be in any engineered study, so the ineligible portions still get their short-life components.
Before you make the election
The deduction is large and the rules are new. A few points belong in the conversation with your CPA before the return is filed.
Who uses the building
The property has to be used by the taxpayer in the production activity. A landlord leasing to a manufacturer generally does not qualify, with narrow exceptions for certain commonly controlled lessors and lessees.
Ten years of use
If the property stops being used in a qualified production activity within 10 years of being placed in service, recapture rules treat the earlier deduction as ordinary income.
State returns
States decide for themselves whether to follow §168(n). State conformity
Manufacturers and production facilities
Agricultural production
Processing plants
Agricultural and chemical production can qualify, depending on the activity. Agriculture and rural
Acquired buildings
Additions and acquisitions
Improvements and additions are tested on their own, and a limited rule covers acquired buildings that were not used in production during the look-back period.
Qualified production property questions
Still have a question? Ask Engineering.
What is qualified production property?
Under §168(n) and IRS Notice 2026-16, it is the portion of nonresidential real property that the taxpayer uses as an integral part of a qualified production activity: manufacturing, production (limited to agricultural and chemical production) or refining of a qualified product, with a substantial transformation of the inputs. Construction must begin after January 19, 2025 and before January 1, 2029, and the property must be placed in service after July 4, 2025 and before January 1, 2031.
Which parts of a plant are excluded?
Portions used for offices, administrative services, lodging, parking, sales activities, research, software development or engineering, and other functions unrelated to the production activity are not eligible. Separating those portions from the production floor, and documenting the split, is the core of a Production Property Study.
Does a building we lease to a manufacturer qualify?
Generally not for the landlord. The property has to be used by the taxpayer in the production activity, and a lessor using it only to collect rent does not meet that requirement. Narrow exceptions exist for certain commonly controlled lessors and lessees, which your CPA should confirm.
How is the election made?
By attaching the required statement to the original federal return for the year the property is placed in service. Your CPA files the return; we provide the allocation between eligible and ineligible portions and the supporting documentation.
What if we stop using the building for production?
If the property stops being used in a qualified production activity within 10 years of being placed in service, recapture rules treat the earlier deduction as ordinary income. That is worth planning for before the election is made.
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