The IRS’s updated guidance on Qualified Production Property (QPP) under Notice 2026-16 delivers a major advantage for manufacturers, producers, and refiners. With more clarity around substantial transformation, eligibility rules, and timing requirements, the notice reshapes how U.S. industrial facilities are evaluated, financed, and positioned for long-term value.
QPP's built-in tax benefit
IRS Notice 2026-16 provides the actionable framework needed to capitalize on one of the OBBBA's most powerful tax incentives. QPP can be fully expensed in year one, a dramatic acceleration versus the traditional 39-year recovery period. The result is a significant near-term reduction in tax liability and a meaningful improvement in cash flow for capital-intensive businesses investing in new domestic production facilities.
What counts as qualified production
Notice 2026-16 confirms that eligible QPP must be the site of a Qualified Production Activity (QPA), meaning the property must support substantial transformation of raw materials or components into a final, distinct product. This includes assembling complex products like engines or vehicles and excludes minor or easily reversible processes such as packaging gift baskets and subscription boxes.
Bottom line: To qualify as QPP, the property’s production activity must be irreversible, and the end product cannot easily be returned to its prior state.
QPP eligible
- Real property integral to manufacturing or production, placed in service during established window
- Portions of building shell where production actually occurs
- Receiving and raw-material storage areas
Not QPP eligible
- Retail or office space
- Parking
- Software development space
- Packaging, labeling, or minor assembly areas
- Storage for component parts or finished goods
Integral part requirement
In addition, for property to qualify as QPP, it must function as an integral part of the QPA — meaning it must be directly involved in the production process. Each building is evaluated as its own Unit of Property (UoP), though multiple buildings on the same or contiguous land may be treated as a single UoP when they operate as a unified facility — creating an advantage for large or campus-style manufacturing operations.
Timing specifications
To claim QPP benefits, projects must meet strict timing rules:
New construction
- Construction must begin between 1/20/25 and 12/31/28
- Property must be placed in service before 1/1/31
- Original use must begin with the taxpayer
- Property must be used as an integral part of a QPA
Acquisition
- Acquisition must occur between 1/20/25 and 12/31/28
- Placed in service before 1/1/31
- Property was not previously used by the taxpayer prior to the acquisition
- Property was not used in a QPA by anyone between 1/1/21 and 5/12/25
Third-party lease situations
OBBBA initially created ambiguity around properties leased to a tenant conducting production — a common structure in real-world manufacturing. Notice 2026-16 resolves this:
- Consolidated groups
If the landlord and tenant are in the same consolidated group, the tenant’s QPA is attributed to the landlord. - Commonly controlled structures (≥50% ownership)
The same attribution as consolidated groups applies and the landlord can claim QPP based on the tenant’s qualifying use.
Bottom line: Typical real estate holding/operating structures, related-party leases, and tiered ownership groups can now benefit from QPP.
Allocating QPP in mixed-use properties
Only the portions of a property directly tied to manufacturing are eligible. Notice 2026-16 provides a clear path for determining that allocation:
- Cost segregation data is explicitly permitted to allocate QPP and non-QPP areas.
- Engaging a qualified cost segregation engineer early is critical to accurately identify and support QPP areas.
- Strong documentation will be key to a defensible claim.
De minimis rule
If 95% or more of a property’s physical space meets the integral-part requirement at the time it’s placed in service, the taxpayer may elect to treat the entire property as QPP. This simplifies the analysis for predominantly manufacturing properties and eliminates the need for detailed allocation.
Positioning QPP for success
For manufacturers, producers, and refiners, the takeaway is clear: facilities that support real production activity are now more valuable. But capturing these incentives depends on timing, facility design, and documentation. Those who can identify qualifying space, meet eligibility requirements, and make the election correctly will be best positioned to unlock QPP's full benefit.
This content is for informational purposes only and does not constitute tax, legal, or financial advice. Avison Young and its representatives are not tax advisors. Please consult a qualified tax professional regarding your specific situation.
Have questions about QPP benefits or identifying QPP-eligible space? We're here to help.
Market intelligence contact
-
Peter Kroner
Director, National Industrial, Market Intelligence
Chicago, Cleveland, Columbus, Detroit, Indianapolis, Minneapolis, Pittsburgh
Industrial, Strategic Business Advisory, Market Intelligence
Contact
