n-26-16.pdf

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Part III – Administrative, Procedural, and Miscellaneous

Interim Guidance on Special Depreciation Allowance for Qualified Production Property

Notice 2026-16

SECTION 1. PURPOSE
This notice announces that the Department of the Treasury (Treasury Department)
and the Internal Revenue Service (IRS) intend to issue proposed regulations
(forthcoming proposed regulations) addressing the special depreciation allowance for
qualified production property under § 168(n) of the Internal Revenue Code (Code),
1
as
added by § 70307 of Public Law 119-21, 139 Stat. 72 (July 4, 2025), commonly known
as the One, Big, Beautiful Bill Act (OBBBA). The Treasury Department and IRS expect
the forthcoming proposed regulations to be consistent with the interim guidance
provided in sections 3 through 8 of this notice. Section 3 of this notice provides general
definitions for purposes of the notice. Section 4 of this notice addresses the definition of
qualified production property. Section 5 of this notice addresses the definition of
qualified production activity and other related terms. Section 6 of this notice addresses
special rules. Section 7 of this notice addresses the time and manner for making an
election to designate property as qualified production property. Section 8 of this notice
addresses depreciation recapture due to a change in use of qualified production

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Unless otherwise specified, all “section” or “§” references are to sections of the Code or the Income Tax
Regulations (26 CFR part 1).

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property. Section 9 of this notice addresses the expected applicability date of the
forthcoming proposed regulations and the ability of taxpayers to rely on the guidance in
this notice.
SECTION 2. BACKGROUND
.01 In general. Section 167(a) allows as a deduction a reasonable allowance for the
exhaustion, wear and tear, and obsolescence of property used in a trade or business or
of property held for the production of income (depreciation deduction). The depreciation
deduction allowable for tangible depreciable property placed in service after 1986
generally is determined under the Modified Accelerated Cost Recovery System
(MACRS) provided by § 168.
Section 70307 of the OBBBA amended § 168 to add § 168(n) to provide a temporary
special depreciation allowance for qualified production property placed in service after
July 4, 2025. Section 168(n)(1)(A) provides that, for any qualified production property
for which an election is made, the depreciation deduction provided by § 167(a) for the
taxable year such property is placed in service includes an allowance equal to
100 percent of the adjusted basis of the qualified production property. Section
168(n)(1)(B) provides that the adjusted basis of the qualified production property is
reduced by the amount of the deduction under § 168(n)(1)(A) before computing the
amount otherwise allowable as a depreciation deduction for such taxable year and any
subsequent taxable year.
.02 Definition of qualified production property.
(1) In general. Section 168(n)(2)(A) defines the term qualified production property
as that portion of any nonresidential real property:

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(a) to which § 168 applies,
(b) that is used by the taxpayer as an integral part of a qualified production
activity (as defined in § 168(n)(2)(D)),
(c) that is placed in service in the United States or any territory of the United
States,
(d) the original use of which commences with the taxpayer,
(e) the construction of which begins after January 19, 2025, and before January
1, 2029,
(f) that is designated by the taxpayer in an election under § 168(n), and
(g) that is placed in service after July 4, 2025, and before January 1, 2031.
(2) Leased property. Under § 168(n)(2)(A), for purposes of determining whether
property is used by the taxpayer as an integral part of a qualified production activity, in
the case of property with respect to which the taxpayer is a lessor, property used by a
lessee is not considered to be used by the taxpayer as part of a qualified production
activity.
(3) Special rule for certain property not previously used in qualified production
activities.
(a) In general. Section 168(n)(2)(B) provides special rules for determining
whether certain used property may be qualified production property. Under
§ 168(n)(2)(B)(i), a taxpayer that acquires used property after January 19, 2025, and
before January 1, 2029, is treated as the original user of the property and the
construction of the property is treated as having begun after January 19, 2025, and
before January 1, 2029, if:

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(i) 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,
(ii) the property was not used by the taxpayer at any time prior to such
acquisition, and
(iii) the acquisition of the property meets the requirements of § 179(d)(2) and
(3) (that is, the property is not acquired from a related party or by a member of a
controlled group from another member of the same group, and the taxpayer’s basis in
the property is not determined by reference to its basis in the hands of the transferor).
(b) When property is acquired. Section 168(n)(2)(B)(ii)(I) provides that, for
purposes of determining whether used property is acquired before the period that
begins after January 19, 2025, and ends before January 1, 2029, the property is treated
as acquired not later than the date on which the taxpayer enters into a written binding
contract for such acquisition. Section 168(n)(2)(B)(ii)(II) provides that used property is
treated as acquired not earlier than such date for purposes of determining whether it is
acquired after such period.
(4) Exclusion of office space, etc. 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.
(5) Definition of qualified production activity. Section 168(n)(2)(D) defines qualified

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production activity as the manufacturing, production, or refining of a qualified product
that results in a substantial transformation of the property comprising the qualified
product.
(6) Definition of production. Section 168(n)(2)(E) provides that production does not
include activities other than agricultural and chemical production.
(7) Definition of qualified product. Section 168(n)(2)(F) defines a qualified product
as any tangible personal property, other than a food or beverage prepared in the same
building as a retail establishment in which it is sold.
(8) Other rules.
(a) Syndication. Section 168(n)(2)(G) provides that, for purposes of
§ 168(n)(2)(A)(iv), which requires that property must be originally used by a taxpayer to
be qualified production property in that taxpayer’s hands, rules similar to
§ 168(k)(2)(E)(iii) apply.
(b) Extension of time for satisfying placed-in-service-date requirement under
certain circumstances. Under § 168(n)(2)(H), in the case of a taxpayer prevented from
placing in service property that would otherwise be qualified production property before
January 1, 2031, the Secretary of the Treasury Department or the Secretary’s delegate
(Secretary) may extend the time for satisfying the placed-in-service-date requirement if
the Secretary determines that such taxpayer was prevented from placing the property in
service before January 1, 2031, due to an act of God (as defined in the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, § 101(1), 42 U.S.C.
9601).
(c) Alternative minimum tax. Section 168(n)(3) provides that, in determining

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alternative minimum taxable income under § 55, the deduction under § 167 for qualified
production property is determined under § 168 without regard to any adjustment under
§ 56.
.03 Coordination with certain other provisions.
(1) Other special depreciation allowances. Section 168(n)(4)(A) provides that, for
purposes of § 168(k)(7) (election out of the special depreciation allowance for qualified
property), § 168(l)(3)(D) (election out of the special depreciation allowance for qualified
second generation biofuel plant property), and § 168(m)(2)(B)(iii) (election out of the
special depreciation allowance for qualified reuse and recycling property), qualified
production property is treated as a separate class of property, and the taxpayer is
treated as having made an election under such subsections with respect to such class if
the taxpayer elects to treat the property as qualified production property under § 168(n).
(2) Alternative depreciation property. Section 168(n)(4)(B) provides that qualified
production property does not include any property to which the alternative depreciation
system (ADS) under § 168(g) applies. For purposes of the election to use ADS under
§ 168(g)(7)(A), qualified production property is treated as separate nonresidential real
property.
.04 Recapture. Section 168(n)(5)(A) provides that if, at any time during the 10-year
period beginning on the date that qualified production property is placed in service by
the taxpayer, the property ceases to be used as an integral part of a qualified production
activity and is used in another productive use, § 1245 is applied by (1) treating the
property as having been disposed of when first used in a productive use that is not a
qualified production activity, and (2) treating as ordinary income the excess of the

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property’s recomputed basis, as defined in § 1245(a)(2), over its adjusted basis. In
addition, § 168(n)(5)(B) provides that the taxpayer’s basis in the property and allowance
for depreciation with respect to such property is appropriately adjusted to take into
account the ordinary income recognized by reason of § 168(n)(5)(A).
.05 Election to apply § 168(n). Section 168(n)(6)(A) provides that an election under
§ 168(n)(6) for any taxable year (1) must specify the nonresidential real property subject
to the election and the portion of such property designated as qualified production
property under § 168(n)(2)(A)(vi), and (2) except as otherwise provided by the
Secretary, is made on the taxpayer’s Federal income tax return for the taxable year.
Further, such election is made in such manner as the Secretary may prescribe by
regulations or other guidance. Section 168(n)(6)(B) provides that any election made
under § 168(n)(6), and any specification contained in any such election, may not be
revoked except with the consent of the Secretary (and the Secretary may provide such
consent only in extraordinary circumstances).
.06 Authority to prescribe regulations and other guidance. Section 168(n)(7) directs
the Secretary to issue regulations or other guidance as may be necessary or
appropriate to carry out the purposes of § 168(n), including regulations or other
guidance providing rules (1) for what constitutes substantial transformation of property
that are consistent with guidance provided under § 954(d), and (2) for the application of
the depreciation recapture rule in § 168(n)(5) with respect to a change in use by a
transferee following a fully or partially tax-free transfer of qualified production property.
SECTION 3. GENERAL DEFINITIONS
For purposes of this notice, the following general definitions apply, but see section

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5.02 of this notice for definitions specifically applicable to defining a qualified production
activity:
.01 Property. The term property means a single unit of property, as determined
under section 4.03 of this notice.
.02 Eligible property. The term eligible property refers to property, or the collective
portions thereof, meeting the requirements in section 4.01 of this notice (other than the
requirement in section 4.01(6) of this notice).
.03 Ineligible property. The term ineligible property refers to any property, or any
portion thereof, that is not eligible property.
.04 Building. The term building has the same meaning as in § 1.48-1(e)(1).
.05 Structural components. The term structural components has the same meaning
as in § 1.48-1(e)(2).
.06 MACRS property. The term MACRS property has the same meaning as in
§ 1.168(b)-1(a)(2).
.07 Placed in service. The term placed in service has the same meaning as the term
“first placed in service” in § 1.167(a)-11(e)(1).
.08 United States. The term United States has the same meaning as in
§ 7701(a)(9).
.09 Territory of the United States. The term territory of the United States means one
of the following territories of the United States: American Samoa, Guam, the Northern
Mariana Islands, the Virgin Islands, and the Commonwealth of Puerto Rico (see
§ 7701(d)).
.10 Unadjusted depreciable basis. The term unadjusted depreciable basis has the

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same meaning as in § 1.168(b)-1(a)(3).
SECTION 4. QUALIFIED PRODUCTION PROPERTY
.01 In general. Except as otherwise provided in section 4.06 of this notice, the term
qualified production property (QPP) means property, or a portion thereof, that is
nonresidential real property and—
(1) That is MACRS property;
(2) That is used by the taxpayer, or will be used by the taxpayer once placed in
service, as an integral part of a qualified production activity (QPA), as defined in section
5 of this notice (integral part requirement);
(3) That is placed in service in the United States or any territory of the United
States;
(4) The original use of which commences with the taxpayer (original use
requirement);
(5) The construction of which begins after January 19, 2025, and before January 1,
2029, as determined under section 4.05 of this notice (beginning of construction
requirement);
(6) That the taxpayer designates as QPP under section 4.09 of this notice in an
election made in the time and manner provided in section 7 of this notice;
(7) That is placed in service after July 4, 2025, and before January 1, 2031
(placed-in-service-date requirement);
(8) That is not property to which the alternative depreciation system (ADS) under
§ 168(g) applies; and
(9) That is not ineligible property described in section 4.07 of this notice.

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.02 Integral part requirement.
(1) In general. Property, or a portion thereof, is used as an integral part of a QPA
and satisfies the integral part requirement if a QPA is conducted in, or takes place
within, the physical space of such property or within a portion of the physical space
thereof. If a QPA is conducted in, or takes place within, only a portion of the physical
space of a property, only such portion satisfies the integral part requirement. Each unit
of property, as determined under section 4.03(1) of this notice, must satisfy the integral
part requirement on its own; however, see section 4.03(2) for a special rule for
integrated facilities.
(2) De minimis rule. If 95 percent or more of the physical space of a property
satisfies the integral part requirement at the time the property is placed in service, the
taxpayer may elect to treat the entire property as satisfying the integral part
requirement. Such election is made by including a declaration in the taxpayer’s election
statement under section 7 of this notice.
(3) Property used by a lessee.
(a) In general. Except as provided in section 4.02(3)(b) and (c) of this notice, in
the case of property with respect to which the taxpayer is a lessor, property used by a
lessee engaged in a QPA is not treated as used by the taxpayer as an integral part of a
QPA and the taxpayer does not satisfy the integral part requirement. See
§ 168(n)(2)(A).
(b) Exception for consolidated groups. If a member (S) of a consolidated group
(each as defined in § 1.1502-1) owns and leases property to another member (B) of the
group (intercompany lease), then for purposes of section 4.02(3)(a) of this notice, S is

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not treated as a lessor with respect to the property, and for purposes of section 4.02(1)
of this notice, the consolidated group is treated as a single taxpayer. Accordingly, S
determines whether the leased property subject to the intercompany lease with B
satisfies the integral part requirement by reference to the trade or business activities of
B conducted in, or taking place within, the leased property.
(c) Exception for commonly controlled pass-through entities. If a partnership or
an S corporation, referred to as a lessor pass-through entity in this notice, or an
individual leases property to a commonly controlled person, then for purposes of section
4.02(3)(a) of this notice, the lessor pass-through entity or lessor individual is not treated
as a lessor with respect to the property, and for purposes of section 4.02(1) of this
notice, the lessor pass-through entity or lessor individual determines whether the
property meets the integral part requirement by reference to the commonly controlled
person’s trade or business activities conducted in, or taking place within, the leased
property. The term commonly controlled person means either:
(i) a sole proprietorship, partnership, or corporation of which 50 percent or
more is owned, directly or by attribution under § 267(b) or § 707(b), by the same person
or group of persons that own, directly or by attribution under § 267(b) or § 707(b),
50 percent or more of the lessor pass-through entity for a majority of the taxable year in
which the property is placed in service, including on the last day of such year, or
(ii) a sole proprietorship, partnership, or corporation of which 50 percent or
more is owned, directly or by attribution under § 267(b) or § 707(b), by the lessor
individual or the lessor pass-through entity for a majority of the taxable year in which the
property is placed in service, including on the last day of such year.

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.03 Unit-of-property determination.
(1) In general. Except as provided in section 4.03(2) of this notice, the term unit of
property means the asset as determined using the rules under § 1.168(i)-8(c)(4).
Accordingly:
(a) Each building, including its structural components, is a single unit of property;
and
(b) If the taxpayer places in service an improvement or addition to an asset after
the taxpayer placed the asset in service, the improvement or addition, including any of
its structural components, is a separate unit of property.
(2) Special rule for integrated facilities. Solely for purposes of satisfying the
integral part requirement, in the case of multiple properties that operate as an integrated
facility (as evidenced by their actual operation) and that are physically located or co-
located on the same piece or contiguous pieces of land, all properties comprising the
integrated facility may be treated as a single unit of property. A property that is
comprised solely of ineligible property (as described in section 4.07 of this notice) may
not be treated as operating as an integrated facility with other properties and may not be
treated as a single unit of property with other properties that comprise an integrated
facility.
.04 Original use commences with the taxpayer. For purposes of determining
whether property satisfies the original use requirement, a taxpayer applies rules
consistent with § 1.168(k)-2(b)(3)(ii)(A) through (C).
.05 Determination of when construction begins. For purposes of determining
whether property satisfies the beginning of construction requirement, a taxpayer applies

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rules consistent with § 1.168(k)-2(b)(5)(iv)(B), including the safe harbor provided in
§ 1.168(k)-2(b)(5)(iv)(B)(2).
.06 Special rule for certain property not previously used in a QPA.
(1) In general. In the case of used property acquired by a taxpayer after January
19, 2025, and before January 1, 2029, the original use requirement and beginning of
construction requirement are treated as met if the following requirements are satisfied:
(a) Such property was not used in a QPA (determined without regard to whether
such activity resulted in a substantial transformation of the property comprising a
qualified product) by any person at any time during the period beginning on January 1,
2021, and ending on May 12, 2025;
(b) Such property was not used by the taxpayer at any time prior to such
acquisition;
(c) The acquisition of such property meets the requirements of § 179(d)(2)(A),
(B), and (C), and § 1.179–4(c)(1)(ii), (iii), and (iv); or § 1.179–4(c)(2) (property is
acquired by purchase); and
(d) The acquisition of such property meets the requirements of § 179(d)(3) and
§ 1.179–4(d) (cost of property).
(2) Property was not used by the taxpayer at any time prior to acquisition. For
purposes of determining whether used property meets the requirement in section
4.06(1)(b) of this notice, a taxpayer applies rules consistent with the used property
acquisition requirements in §§ 1.168(k)-2(b)(3)(iii)(B), 1.168(k)-2(b)(3)(iv)(D)(1)(i), and
1.1502-68(b).
(3) Section 179 requirements. For purposes of determining whether used property

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meets the requirements in section 4.06(1)(c) and (d) of this notice, a taxpayer applies
rules consistent with the special rules in §§ 1.168(k)-2(b)(3)(iii)(C), 1.168(k)-
2(b)(3)(iv)(D)(1)(ii), 1.168(k)-2(b)(3)(iv)(D)(2), and 1.1502-68(c).
(4) Determining used property acquisition date. For purposes of determining
whether used property is acquired after January 19, 2025, and before January 1, 2029,
a taxpayer applies rules consistent with § 1.168(k)-2(b)(5).
.07 Ineligible property.
(1) In general. Ineligible property includes any portion of property used for offices,
administrative services, lodging, parking, sales activities, research activities, software
development or engineering activities, or other functions unrelated to a QPA. See
§ 168(n)(2)(C) and (4)(B). Additionally, any portion of property used to store finished
products and certain other items is not used as an integral part of a QPA and is thus
ineligible property (see section 5.01(2)(b)(ii) of this notice).
(2) Property used for other ineligible activities. Ineligible property also includes any
property, or a portion thereof, that contains a manufacturing, production, or refining
activity, or any other activity, that is not within the scope of section 5.01 of this notice.
For example, a property that exclusively contains activities described in section 5.01(3)
of this notice is ineligible property.
.08 Allocation of basis to eligible property.
(1) In general. A taxpayer may use any reasonable method to allocate a property’s
unadjusted depreciable basis between eligible property and ineligible property. For this
purpose, the use of square footage, cost segregation data, architectural or engineering
plans, process diagrams, or construction invoices to allocate unadjusted depreciable

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basis to eligible property may be a reasonable method. For example, assume that a
taxpayer constructs property and 50 percent of the square footage of the property is
eligible property. The taxpayer may determine the unadjusted depreciable basis of the
eligible property by multiplying the unadjusted depreciable basis of the property by
50 percent. A taxpayer may use more than one reasonable allocation method for a
property if using a single allocation method would not properly allocate unadjusted
depreciable basis between eligible and ineligible property. Each allocation method must
be applied consistently and reflect the property’s facts and circumstances. Using
employee headcount or employee time spent on QPA activities is not a reasonable
method to allocate unadjusted depreciable basis to eligible property.
(2) Dual-use infrastructure. In the case of property or a portion thereof which
contains infrastructure that serves both eligible property and ineligible property (such as
a central air conditioning system or a sprinkler system), a taxpayer may allocate the
basis of such property between eligible property and ineligible property using any
reasonable method. For this purpose, the use of architectural or engineering plans,
blueprints, process diagrams, product specifications, or a combination thereof, to
allocate unadjusted depreciable basis to eligible property may be a reasonable method
if the resulting allocation takes into account the actual or planned usage of the dual-use
infrastructure. A taxpayer may also use the same allocation method from section
4.08(1) of this notice if such allocation takes into account the actual or planned usage of
the dual-use infrastructure.
.09 Designating the amount of QPP. A taxpayer designates the dollar amount of
eligible property that the taxpayer intends to treat as QPP on a property-by-property

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basis. A taxpayer designates the dollar amount of eligible property by either
designating the entire unadjusted depreciable basis of eligible property as QPP or
designating a specific dollar amount (not to exceed the unadjusted depreciable basis of
the eligible property) as QPP. The amount of the unadjusted depreciable basis of
eligible property designated as QPP must be included in the taxpayer’s election
statement under section 7 of this notice. An election statement made under section 7 of
this notice that does not designate a specific dollar amount of the eligible property’s
unadjusted depreciable basis as QPP will be treated as designating the entire
unadjusted depreciable basis of eligible property as QPP.
.10 Elections out of other special depreciation allowances. For purposes of the
elections out of § 168(k), (l), and (m) under § 168(k)(7), (l)(3)(D), and (m)(2)(B)(iii),
respectively, QPP is treated as a separate class of property and a taxpayer is treated as
having made the applicable election(s) out of §§ 168(k), (l), and (m) with respect to any
QPP as part of making the election under section 7 of this notice to designate all or a
portion of eligible property as QPP. See § 168(n)(4)(A).
.11 Automatic extension of placed-in-service-date requirement under certain
circumstances. An automatic one-year extension of the placed-in-service-date
requirement is granted for any property that is located in a disaster area (as defined in
§ 165(i)(5)(B)) at any time during 2030 (affected property). Accordingly, for affected
property, the requirement to place property in service before January 1, 2031, is
automatically extended to January 1, 2032. If a taxpayer applies the automatic
extension of the placed-in-service-date requirement provided in this section 4.11, the
taxpayer must include a declaration to that effect on the election statement required

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under section 7 of this notice.
.12 Examples. The following examples illustrate the rules set forth in this notice:
(1) Example 1.
(a) Facts. In 2026, Company A, a calendar-year taxpayer, begins construction
on a 200,000-square-foot building (Factory A) located in the United States that
Company A will use in its trade or business to conduct a manufacturing activity that is a
QPA (as defined in section 5 of this notice). By applying rules consistent with
§ 1.168(k)-2(b)(5)(iv)(B), Company A determines that construction of Factory A began in
February 2026. Construction of Factory A was completed in November 2027, and
Factory A was placed in service in December 2027. Upon completion, Factory A has an
unadjusted depreciable basis of $60,000,000. No activities are conducted in, or take
place within, Factory A except for Company A’s manufacturing activity and Factory A
does not contain any space that is ineligible property under section 4.07 of this notice.
Factory A is not subject to the alternative depreciation system under § 168(g). On
Company A’s timely filed original Federal income tax return for its taxable year ending
December 31, 2027, Company A designates $50,000,000 of Factory A’s $60,000,000
unadjusted depreciable basis as QPP in an election statement that is consistent with the
requirements in section 7 of this notice.
(b) Analysis. Factory A’s entire unadjusted depreciable basis of $60,000,000 is
allocable to eligible property because (i) Factory A is nonresidential real property,
(ii) Factory A is MACRS property, (iii) all of Factory A is used as an integral part of a
QPA, (iv) Factory A’s original use commenced with Company A, (v) Factory A’s
construction began after January 19, 2025, and before January 1, 2029, (vi) Factory A is

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placed in service after July 4, 2025, and before January 1, 2031, (vii) Factory A is not
ADS property, and (viii) Factory A is not ineligible property. Accordingly, Company A has
QPP of $50,000,000, equal to the amount of eligible property designated as QPP by
Company A on the election statement filed with its timely filed original Federal income
tax return.
(2) Example 2.
(a) Facts. The facts are the same as in Example 1, except that Factory A
contains 6,000 square feet of office space and 4,000 square feet of other space not
used as an integral part of a QPA, and Company A makes an election to use the de
minimis rule described in section 4.02(2) of this notice.
(b) Analysis. Out of Factory A’s total square footage of 200,000 square feet, only
190,000 square feet satisfies the integral part requirement as Factory A also contains
6,000 square feet of office space and 4,000 square feet of other space that is not used
as an integral part of a QPA. As the square footage that satisfies the integral part
requirement is 95% (190,000 square feet / 200,000 square feet) of Factory A’s total
square footage, and Company A made an election to use the de minimis rule described
in section 4.02(2) of this notice, Factory A satisfies the de minimis rule described in
section 4.02(2) of this notice and Company A may treat the entire square footage of
Factory A as satisfying the integral part requirement.
Therefore, Factory A’s entire unadjusted depreciable basis of $60,000,000 is
allocable to eligible property because (i) Factory A is nonresidential real property,
(ii) Factory A is MACRS property, (iii) the entire square footage of Factory A is treated as
used by Company A as an integral part of a QPA due to the application of the de

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minimis rule in section 4.02(2) of this notice, (iv) Factory A’s original use commenced
with Company A, (v) Factory A’s construction began after January 19, 2025, and before
January 1, 2029, (vi) Factory A is placed in service after July 4, 2025, and before
January 1, 2031, (vii) Factory A is not ADS property, and (viii) Factory A is not ineligible
property. Accordingly, Company A has QPP of $50,000,000, equal to the amount of
eligible property designated as QPP by Company A on the election statement filed with
its timely filed original Federal income tax return.
(3) Example 3.
(a) Facts. Company A, a calendar-year taxpayer, previously placed in service a
building (Factory B) during its taxable year ended December 31, 2023, and has since
used Factory B to conduct manufacturing activities which constitute a QPA (as defined
in section 5 of this notice). No activities are conducted in, or take place within, Factory
B except for Company A’s manufacturing activities and Factory B does not contain any
space that is ineligible property under section 4.07 of this notice.
In May 2028, Company A begins construction of an upgrade to Factory B’s power
distribution system (Electrical System Upgrade) and places the Electrical System
Upgrade in service in June 2028. The cost of the Electrical System Upgrade is
$2,000,000, which Company A capitalizes pursuant to § 1.263(a)-3. The Electrical
System Upgrade is qualified improvement property under § 168(e)(6).
(b) Analysis. Under section 4.03(1)(b) of this notice, Factory B and the Electrical
System Upgrade are treated as separate units of property. However, because Factory
B and the Electrical System Upgrade operate as an integrated facility and are physically
located on the same piece of land, Factory B and the Electrical System Upgrade may

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be treated as a single unit of property under section 4.03(2) of this notice for purposes
of satisfying the integral part requirement. Accordingly, whether the Electrical System
Upgrade satisfies the integral part requirement, either in whole or in part, is determined
by reference to whether Factory B satisfies the integral part requirement, either in whole
or in part.
The entire unadjusted basis of the Electrical System Upgrade of $2,000,000 is
allocable to eligible property because (i) the Electrical System Upgrade is nonresidential
real property, (ii) the Electrical System Upgrade is MACRS property, (iii) all of Factory B
is used by Company A as an integral part of a QPA, (iv) the Electrical System Upgrade’s
original use commenced with Company A, (v) the Electrical System Upgrade’s
construction began after January 19, 2025, and before January 1, 2029, (vi) the
Electrical System Upgrade is placed in service after July 4, 2025, and before January 1,
2031, (vii) the Electrical System Upgrade is not ADS property, and (viii) the Electrical
System Upgrade is not ineligible property. Accordingly, Company A may designate up to
$2,000,000 of the eligible property as QPP if it does so in the manner provided in
section 4.09 of this notice in an election made in the time and manner provided in
section 7 of this notice. In addition, Company A is treated as having made an election
under § 168(k)(7) not to deduct the additional first year depreciation under § 168(k) with
respect to any portion of the unadjusted depreciable basis of the Electrical System
Upgrade which Company A designates as QPP in an election under section 7 of this
notice.
(4) Example 4.
(a) Facts. The facts are the same as in Example 3. In December 2028,

21

Company A performs routine maintenance on Factory B’s electrical system at a cost of
$100,000. Company A elects to treat the maintenance cost as an amount paid or
incurred to improve the electrical system and capitalizes such cost under § 1.263(a)-
3(n). The capitalized maintenance costs are qualified improvement property under
§ 168(e)(6).
(b) Analysis. Under section 4.03(1)(b) of this notice, Factory B and the
capitalized maintenance costs are treated as separate units of property. However,
because Factory B and the capitalized maintenance costs operate as an integrated
facility and are physically located on the same piece of land, Factory B and the
capitalized maintenance costs may be treated as a single unit of property under section
4.03(2) of this notice for purposes of satisfying the integral part requirement.
Accordingly, whether the capitalized maintenance costs satisfy the integral part
requirement is determined by reference to whether Factory B, either in whole or in part,
satisfies the integral part requirement.
The entire unadjusted depreciable basis of the capitalized maintenance costs of
$100,000 is allocable to eligible property because (i) the capitalized maintenance costs
are nonresidential real property, (ii) the capitalized maintenance costs are MACRS
property, (iii) all of Factory B is used by Company A as an integral part of a QPA, (iv) the
capitalized maintenance costs’ original use commenced with Company A, (v) the
capitalized maintenance costs’ construction began after January 19, 2025, and before
January 1, 2029, (vi) the capitalized maintenance costs are placed in service after July
4, 2025, and before January 1, 2031, (vii) the capitalized maintenance costs are not
ADS property, and (viii) the capitalized maintenance costs are not ineligible property.

22

Accordingly, Company A may designate up to $100,000 of the eligible property as QPP
if it does so in the manner provided in section 4.09 of this notice in an election made in
the time and manner provided in section 7 of this notice. In addition, Company A is
treated as having made an election under § 168(k)(7) not to deduct the additional first
year depreciation under § 168(k) with respect to any portion of the unadjusted
depreciable basis of the capitalized maintenance costs which Company A designates as
QPP in an election under section 7 of this notice.
(5) Example 5.
(a) Facts. Company A, a calendar-year taxpayer, previously placed in service
two buildings (Factory B and Factory C) during its taxable year ended December 31,
2023, on a single piece of land located in in the United States and has since used
Factory B and Factory C to conduct manufacturing activities which constitute a QPA (as
defined in section 5 of this notice). No activities are conducted in, or take place within,
Factory B and Factory C except for Company A’s manufacturing activities and Factory B
and Factory C do not contain any space that is ineligible property under section 4.07 of
this notice.
In 2026, Company A, begins construction on a new building (Building A) which is
located on a contiguous piece of land to Factory B and Factory C. Building A will be
used to store raw materials and other manufacturing inputs used or consumed during
the manufacturing activities taking place within Factory B and Factory C. By applying
rules consistent with § 1.168(k)-2(b)(5)(iv)(B), Company A determines that construction
of Building A began in May 2026. Construction of Building A was completed in March
2027, and Building A was placed in service in April 2027. Upon completion, Building A

23

has an unadjusted depreciable basis of $20,000,000. No activities are conducted in, or
take place within, Building A except for Company A’s storage of raw materials and other
manufacturing inputs and Building A does not contain any space that is ineligible
property under section 4.07 of this notice. Building A is not subject to the alternative
depreciation system under § 168(g).
(b) Analysis. Under section 4.03(1)(a) of this notice, Building A, Factory B, and
Factory C are each treated as a separate unit of property. However, as Building A,
Factory B, and Factory C operate as an integrated facility (as evidenced by their actual
operation) and are physically located on contiguous pieces of land, under section
4.03(2) of this notice, Company A may treat all three buildings as a single unit of
property for purposes of satisfying the integral part requirement. Accordingly, Building A
satisfies the integral part requirement because, when its activities are combined with the
activities of Factory B and Factory C, Building A is used as in integral part of a QPA (as
defined in section 5 of this notice).
Building A’s entire unadjusted depreciable basis of $20,000,000 is allocable to
eligible property because (i) Building A is nonresidential real property, (ii) Building A is
MACRS property, (iii) Building A is used by Company A as an integral part of a QPA
because Building A, Factory B, and Factory C are an integrated facility, (iv) Building A’s
original use commenced with Company A, (v) Building A’s construction began after
January 19, 2025, and before January 1, 2029, (vi) Building A is placed in service after
July 4, 2025, and before January 1, 2031, (vii) Building A is not ADS property, and
(viii) Building A is not ineligible property. Accordingly, Company A may designate all or
any portion of the eligible property as QPP if it does so in the time and manner provided

24

in section 4.09 of this notice in an election made in the manner provided in section 7 of
this notice.
(6) Example 6.
(a) Facts. In 2027, Company C, a calendar-year taxpayer, begins constructing a
building (Factory D), in the United States which Company C will use in its trade or
business as an automobile plant. Company C will use Factory D to assemble and
combine engines, transmissions, chassis, and other produced subcomponents and
purchased inputs into a finished automobile using various processes, including molding,
welding, stamping, and other similar activities, that materially change the form or
function of the input materials and components such that they are distinguishable from,
and cannot be readily returned to, their original state. By applying rules consistent with
§ 1.168(k)-2(b)(5)(iv)(B), Company C determines that construction of Factory D began
in August 2027. Construction of Factory D was completed in September 2029, and
Factory D was placed in service in October 2029. Upon completion, Factory D has an
unadjusted depreciable basis of $60,000,000. No portion of Factory D is used to
perform activities described in section 4.07 of this notice. Factory D is not subject to the
alternative depreciation system under § 168(g).
(b) Analysis. Company C’s trade or business activity conducted in Factory D is
manufacturing, as defined in section 5.02(5) of this notice, and constitutes a QPA under
section 5.01(1) of this notice. Factory D is eligible property because (i) it is
nonresidential real property, (ii) it is MACRS property, (iii) all of Factory D is used by
Company C as an integral part of a QPA, (iv) its original use commenced with Company
C, (v) its construction began after January 19, 2025, and before January 1, 2029, (vi) it

25

is placed in service after July 4, 2025, and before January 1, 2031, (vii) it is not ADS
property, and (viii) it is not ineligible property. Accordingly, Company C may designate
up to $60,000,000 of the eligible property’s unadjusted depreciable basis as QPP
provided it does so in the manner provided in section 4.09 of this notice in an election
made in the time and manner provided in section 7 of this notice.
SECTION 5. QUALIFIED PRODUCTION ACTIVITY
.01 Qualified production activity.
(1) In general. The term qualified production activity (QPA) means the
manufacturing, production, or refining of a qualified product. A trade or business activity
of a taxpayer does not constitute manufacturing, production, or refining of a qualified
product unless the trade or business activity of such taxpayer results in a substantial
transformation of the property comprising the qualified product (as defined in section
5.02(9) of this notice). A manufacturing, production, or refining activity (for example, a
manufacturing or production subprocess), or a related activity, that does not itself give
rise to a substantial transformation of the property comprising a qualified product may
nevertheless be included in a QPA, or will not cause a taxpayer to fail to have a QPA, if
such activity meets the requirements of section 5.01(2) or (3) of this notice.
(2) Essential activities.
(a) In general. A QPA includes any manufacturing, production, or refining activity
that does not result in a substantial transformation of the property comprising a qualified
product if the activity is essential to the completion of the QPA. A manufacturing,
production, or refining activity is essential to the completion of a QPA if:
(i) the activity occurs within the same property, or within the same integrated

26

facility (as determined under section 4.03(2) of this notice), in which the substantial
transformation of the property comprising the qualified product occurs;
(ii) the activity does not occur within ineligible property described in section
4.07(1) of this notice; and
(iii) without the activity, the substantial transformation of the property
comprising the qualified product:
(A) cannot occur,
(B) would result in an end product that is different in quality than the intended
qualified product, or
(C) would result in a quantity of qualified product that is different from the
intended quantity.
(b) Treatment of storage space and loading bays.
(i) Storage of raw materials. The receiving and storage of raw materials or
other inputs to be used or consumed during a QPA are activities essential to the QPA if
they are conducted in, or take place within, the same property, or within the same
integrated facility (as determined under section 4.03(2) of this notice), as the QPA.
(ii) Storage of other items. Any other storage activity not described in section
5.01(2)(b)(i) of this notice, such as the storage of finished products, is not an activity
essential to a QPA.
(3) Related activities.
(a) In general. A taxpayer’s trade or business activity will not fail to be a QPA if
the individuals performing or supervising the manufacturing, production, or refining
activities described in either section 5.01(1), (2)(a), or (2)(b)(i) of this notice also

27

perform, or are otherwise involved in, activities related to the QPA if: (i) the related
activity occurs within the same property, or within the same integrated facility (as
determined under section 4.03(2) of this notice) in which the substantial transformation
of the property comprising the qualified product occurs and (ii) the related activity does
not occur within ineligible property described in section 4.07(1) of this notice. The
following activities are examples of other trade or business activities that may be related
to a QPA:
(i) Oversight and direction of the manufacturing, production, or refining
activities that result in the substantial transformation of the property comprising a
qualified product;
(ii) Material selection, vendor selection, or control of the raw materials or
work-in-process that are substantially transformed into a qualified product;
(iii) Management of manufacturing, production, or refining costs or capacities
attributable to the manufacturing, production, or refining activities that result in a
substantial transformation of the property comprising a qualified product (for example,
cost reduction or efficiency initiatives associated with the manufacturing, production, or
refining activities that result in a substantial transformation of the property comprising a
qualified product); or
(iv) Developing, or directing the use or development of, product design and
design specifications, as well as trade secrets, technology, or other intellectual property
used in conducting a manufacturing, production, or refining activity that results in a
substantial transformation of the property comprising the qualified product.
(b) No substantial transformation. If a taxpayer’s trade or business activity within

28

a property or portion thereof includes only activities described in section 5.01(3)(a)(i)-(iv)
of this notice, the taxpayer’s trade or business activity that takes place within that
property or portion thereof does not result in substantial transformation of the property
comprising a qualified product. Accordingly, the taxpayer’s trade or business activity
within that property or portion thereof will not be a QPA.
(4) Ownership of the qualified product. For purposes of determining whether a
taxpayer’s trade or business activity is a QPA, whether the taxpayer is the tax owner of
the qualified product resulting from the QPA is not taken into account to determine
whether the taxpayer’s trade or business activity is a QPA. For example, a trade or
business activity conducted by a taxpayer in which it enters into contract manufacturing
arrangements to manufacture, produce, or refine a qualified product for its customers,
but under which the taxpayer does not own the resulting qualified product, constitutes a
QPA if such activity otherwise meets the definitions and rules provided in this section 5.
.02 Defined terms. For purposes of this notice:
(1) Production. The term production means either agricultural production or
chemical production.
(2) Qualified product. The term qualified product means any tangible personal
property, except any food or beverage prepared in the same building as a retail
establishment in which such property is sold.
(3) Tangible personal property. The term tangible personal property has the same
meaning as in § 1.48-1(c).
(4) Retail establishment. The term retail establishment means a retail sales facility
as defined in § 1.263A-3(c)(5)(ii)(B).

29

(5) Manufacturing. The term manufacturing means to materially change the form
or function of tangible personal property, including parts and components, to create a
new item of tangible personal property that is held for rent, lease, or sale to customers
in the ordinary course of a trade or business. The form or function of the raw materials,
elements, parts, components, or other tangible personal property used as inputs is
considered to be materially changed if, at the completion of the processes giving rise to
the new item of tangible personal property, the materials, elements, parts, components
or other inputs have been transformed such that they are distinguishable from, and
cannot readily be returned to, their original state. In no event will a change in form or
function resulting solely from packaging, repackaging, labeling, minor assembly
operations, or a combination thereof, be considered a material change to the form or
function of tangible personal property.
(6) Refining. The term refining means to purify a substance into a useful and higher-
value product. Examples of refining include—
(a) Removing free fatty acids and other impurities from animal fats by
degumming, decolorization, deacidification, and deodorization;
(b) Processing petroleum, liquid hydrocarbons and other products from crude oil
by using fractionation, straight distillation of crude oil, and/or cracking;
(c) Purifying nonferrous metals (except aluminum) by electrolytic methods or
other processes;
(d) Processing vegetable oils from plant material by removing free fatty acids,
phospholipids, pigments, off-flavors, and other impurities;
(e) Processing vegetable, oilseed, and tree nut oils from purchased oils, such as

30

by degumming and neutralization;
(f) Wet corn milling;
(g) Processing cane or beet sugar from raw cane or beet sugar;
(h) Removing remaining impurities and moisture from animal fat, bones, and
meat scraps through techniques like filtration and bleaching;
(i) Processing tar paving, roofing, and saturated materials from crude petroleum
and manufacturing asphalt;
(j) Extracting alumina (aluminum oxide) generally from bauxite ore;
(k) Processing liquified natural gas or chemical feedstocks from natural gas;
(l) Recovering copper or copper alloys from scrap; and
(m) Recovering nonferrous metals (except copper and aluminum) from scrap.
(7) Agricultural production.
(a) In general. The term agricultural production means the process of cultivating
the ground, typically in fields or large acreage, and includes:
(i) Preparing the soil;
(ii) Planting seeds;
(iii) Raising, cultivating, irrigating, and harvesting crops for sale, rent, or lease
to customers; and
(iv) Breeding, rearing, feeding, and managing livestock for sale, rent, or lease
to customers.
(b) Exclusions. The term agricultural production does not include—
(i) The raising of animals that are not livestock; or
(ii) Activities that benefit persons engaged in agriculture when these activities

31

are not agricultural production, such as food marketing.
(c) Livestock. The term livestock includes cattle, hogs, horses, mules, donkeys,
sheep, goats, captive fur-bearing animals, chickens, turkeys, pigeons, and other poultry.
(8) Chemical production. The term chemical production means a chemical process
whereby a product is formulated from organic and inorganic raw materials, including
preparing raw materials for reaction, combining materials in a reactor to form a new
substance, isolating the final product from byproducts, intermediates, and other
substances, and purifying the final product. Examples of chemical production include—
(a) Basic inorganic chemical manufacturing, such as petrochemical
manufacturing, industrial gas manufacturing, and synthetic dye and pigment
manufacturing;
(b) Basic organic chemical manufacturing, such as ethyl alcohol manufacturing
and cyclic crude, intermediate, and gum and wood chemical manufacturing;
(c) Manufacturing synthetic resins, plastics materials, and non-vulcanizable
elastomers and mixing and blending resins on a custom basis;
(d) Manufacturing nitrogenous or phosphatic materials and mixing with other
ingredients into fertilizers;
(e) Manufacturing pharmaceutical products intended for internal and external
consumption in such forms as ampoules, tablets, capsules, vials, ointments, powders,
solutions, and suspensions;
(f) Manufacturing adhesives, glues, and caulking compounds; and
(g) Manufacturing soaps, detergents, polishes, surface active agents, textile and
leather finishing agents, and other sanitation goods.

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(9) Substantial transformation of the property comprising a qualified product.
(a) In general. The term substantial transformation of the property comprising a
qualified product means the further manufacturing, production, or refining of the
constituent elements, raw materials, inputs, or subcomponents into a final, complete,
and distinct item of property in the hands of the taxpayer that is fundamentally different
from the original constituent elements, materials, inputs, or subcomponents.
(b) Examples of substantial transformation of the property comprising a qualified
product. Examples of substantial transformation of the property comprising a qualified
product include the conversion of wood pulp to paper, steel rods to screws and bolts,
and freshly caught tuna fish to canned tuna.
(c) Example of an activity that does not result in a substantial transformation of
the property comprising a qualified product. An example of an activity that does not
result in a substantial transformation of the property comprising a qualified product is
the grouping and packaging of multiple finished goods for sale as a single item, such as
gift baskets, subscription boxes, and bundled electronics.
(d) No application to other provisions. The definition of the term substantial
transformation of the property comprising a qualified product set forth in section
5.02(9)(a) of this notice, and the illustrative examples contained in this notice, are
limited to determinations under § 168(n), and do not apply with respect to
determinations of whether property has been substantially transformed for any other
purpose, including for purposes of any other provision of the Code or the regulations
thereunder.
.03 Safe harbor for property placed in service during 2025.

33

(1) In general. Notwithstanding the definitions in section 5.02(5), (6), (7), and (8) of
this notice, for property placed in service after July 4, 2025, and on or before December
31, 2025, the taxpayer’s trade or business activity conducted in, or taking place within,
the property will be treated as a QPA under section 5.01 of this notice if (a) the principal
business activity code that the taxpayer, or the relevant trade or business of the
taxpayer, used on its most recently filed Federal income tax return (for example, 2024
Form 1040, Schedule C, line B; 2024 Form 1065, Item A; 2024 Form 851, Part II, or
2024 Form 1120, Schedule K, line 2a), filed before February 19, 2026, is an applicable
NAICS code listed in section 5.03(2) of this notice and (b) such activity results in, or is
otherwise essential to (as determined under 5.01(2) of this notice), the substantial
transformation of the property comprising a qualified product (as defined in section
5.02(9) of this notice). For a taxpayer that does not have such a filed Federal income
tax return because it is filing its first Federal income tax return on or after February 19,
2026, the taxpayer must reasonably determine that its principal business activity code is
an applicable NAICS code on its first Federal income tax return to be eligible for the
safe harbor provided in this section 5.03.
(2) Applicable NAICS code. An applicable NAICS code means any of the NAICS
codes listed under sectors 31, 32, or 33, or under subsectors 111 or 112, that appear in
the North American Industry Classification System (NAICS), United States, 2022,
published by the Office of Management and Budget (OMB), Executive Office of the
President.
2

.04 Example. The following example illustrates the rules set forth in section 5 of this

2
https://www.census.gov/naics/reference_files_tools/2022_NAICS_Manual.pdf.

34

notice:
(1) Facts. Company B owns Factory B, a building, and uses Factory B to process
tomatoes, onions, garlic, and other ingredients (collectively the sauce ingredients) into
jarred tomato sauce for sale in grocery stores (jarred sauce). The jarred sauce is a
qualified product, and the sauce ingredients are the property comprising the qualified
product. The physical space of Factory B exclusively contains the following: a loading
bay used to receive the sauce ingredients (ingredient receiving); a section used to store
the sauce ingredients received at the loading bay (ingredient storage); a section used
to, as applicable to each ingredient, inspect, sort, clean, blanch, peel, chop, mince,
and/or otherwise prepare the sauce ingredients for further processing (ingredient
preparation); a manufacturing space in which the prepared ingredients are combined,
blended, cooked, cooled, preserved, and sealed in labeled jars (sauce processing and
sauce jarring); and a section used to store the jarred sauce prior to shipping to
customers (sauce storage).
(a) Ingredient receiving and ingredient storage. Individuals working in the
ingredient receiving and storage sections of Factory B exclusively engage in receiving
and storage related activities. The form or function of any sauce ingredient is not
materially changed from its original state into a new item of tangible personal property
through the activities conducted in the loading bay and ingredient storage sections of
Factory B.
(b) Ingredient preparation. During the ingredient preparation stage, the forms of
the sauce ingredients are materially changed from their original state such that new
items of tangible personal property result (prepared ingredients), but further processing

35

is required beyond the ingredient preparation stage to arrive at a final, complete, and
distinct item of property (jarred sauce) that is fundamentally different from the original
inputs. However, without this ingredient preparation stage, the sauce processing stage
would result in an end product that is different in quality or quantity from the intended
qualified product. In addition to performing the inspecting, sorting, cleaning, blanching,
peeling, chopping, mincing, and other preparation activities, the individuals working in
ingredient preparation also perform tests to ensure that the prepared ingredients are of
the appropriate quality before they are further processed as a part of the sauce
processing and jarring activities.
(c) Sauce processing and sauce jarring. During the sauce processing and sauce
jarring stage, the forms of the prepared ingredients are further materially changed into
the final, complete, and distinct item of property (jarred sauce). The individuals working
in sauce processing and sauce jarring also perform oversight activities to ensure the
manufacturing process occurs as intended.
(d) Sauce storage. Individuals working in this section of Factory B exclusively
engage in storage related activities of the jarred sauce. The form or function of the
jarred sauce is not further materially changed through the activities conducted in this
section of Factory B.
(2) Analysis.
(a) Existence of a manufacturing activity in Factory B. The ingredient
preparation, sauce processing, and sauce jarring activities are manufacturing as defined
in section 5.02(5) of this notice as the forms of the ingredients and the prepared
ingredients (during the ingredient preparation activities and the sauce processing and

36

sauce jarring activities, respectively) are materially changed into a new item of tangible
personal property (the jarred sauce), which Company B sells to customers in the
ordinary course of its trade or business. Company B’s other activities conducted in
Factory B (the ingredient receiving, ingredient storage, and sauce storage activities) are
not manufacturing under section 5.02(5) of this notice as the forms or functions of the
sauce ingredients and the jarred sauce are not materially changed during such
activities.
(b) Existence of a QPA in Factory B. While both the ingredient preparation and
sauce processing and jarring stages are manufacturing, a substantial transformation of
the property comprising a qualified product occurs only during the sauce processing and
sauce jarring stage because only in this stage are the constituent inputs (the prepared
ingredients) further manufactured into a final, complete, and distinct item of property
(jarred sauce) that is fundamentally different from the original constituent inputs (the
sauce ingredients). Under section 5.01(1) of this notice, Company B’s sauce
processing and jarring activity conducted in Factory B is a QPA.
(c) Scope of Factory B’s QPA.
(i) Ingredient preparation. The material change occurring in the ingredient
preparation stage is not sufficient to constitute a substantial transformation of the sauce
ingredients because the prepared ingredients do not represent a final, complete, and
distinct item of property that is fundamentally different from the sauce ingredients.
However, the ingredient preparation stage is an essential activity under section 5.01(2)
of this notice as (A) it is a manufacturing activity that occurs within the same property
(Factory B) as the substantial transformation of the property, (B) it does not occur in

37

ineligible property described in section 4.07(1) of this notice, and (C) without the
ingredient preparation stage, the sauce processing and jarring stage would result in an
end product that is different in quality or quantity from the intended end product.
Accordingly, under section 5.01(2)(a) of this notice, the ingredient preparation activities
are essential activities, and thus are included in Company B’s QPA conducted in Factory
B.
(ii) Loading bay and ingredient storage activities. The ingredient receiving
activities at the loading bay and the ingredient storage activities relate to raw materials
to be consumed in the QPA (the sauce ingredients) and are conducted in the same
property as the QPA (Factory B). Accordingly, the ingredient receiving and ingredient
storage activities are essential activities under section 5.01(2)(b) of this notice and thus
are included in Company B’s QPA conducted in Factory B.
(iii) Related activities. In addition to the core activities conducted in the
ingredient preparation and sauce processing and sauce jarring stages, the individuals
working in those sections of Factory B also perform quality testing and oversight
activities. As the quality testing and oversight activities occur within the same property
in which the substantial transformation of property comprising the qualified product
occurs (Factory B) and do not occur within ineligible property under section 4.07(1) of
this notice, the quality testing and oversight activities will not cause Company B to fail to
have a QPA under section 5.01(3)(a) of this notice.
(iv) Ineligible property. Under section 5.01(2)(b)(ii) of this notice, storage of
finished products is not an essential activity, and under section 4.07(2) of this notice,
any property, or a portion thereof, used to conduct storage activities described in section

38

5.01(2)(b)(ii) of this notice is ineligible property. Accordingly, the portion of Factory B
used to conduct the sauce storage is ineligible property.
(v) Summary of Factory B’s QPA. The scope of the QPA conducted in, or taking
place within, Factory B thus includes the ingredient receiving and storage stage, the
ingredient preparation stage, and the sauce processing and jarring stages, including the
quality testing and oversight activities performed by individuals working in those
sections or stages of Factory B.
SECTION 6. SPECIAL RULES
.01 Property placed in service and disposed of in the same taxable year. If property
is placed in service and disposed of during the same taxable year, a taxpayer applies
rules consistent with § 1.168(k)-2(g)(1).
.02 Redetermination of basis. If the unadjusted depreciable basis of QPP is
redetermined before January 1, 2031 (for example, due to a contingent purchase price
or discharge of indebtedness), the deduction determined under § 168 is redetermined
under rules consistent with § 1.168(k)-2(g)(2)(i)-(iii).
.03 Like-kind exchanges and involuntary conversions. For replacement MACRS
property (as defined in § 1.168(i)-6(b)(1)) that is QPP at the time of replacement and the
time of replacement of which is after January 19, 2025, and before January 1, 2029, a
taxpayer applies rules consistent with § 1.168(k)-2(g)(5).
SECTION 7. TIME AND MANNER OF MAKING ELECTION
.01 Time for making election and designation. A taxpayer designates, under section
4.09 of this notice, and elects to treat property as QPP by making the election under this
section 7 by the due date, including extensions, of the taxpayer's original Federal

39

income tax return for the taxable year in which the eligible property is placed in service
by the taxpayer.
.02 Manner of making election and designation. A taxpayer makes a designation
and an election under this section 7 by attaching a statement to its Federal income tax
return for the taxable year in which the eligible property is placed in service. The
designation and election are made separately by each person owning the eligible
property (for example, for each member of a consolidated group by the agent for the
group (within the meaning of § 1.1502-77(a) and (c)). The statement, entitled
“STATEMENT PURSUANT TO SECTION 7 OF NOTICE 2026-16”, must include the
following information—
(1) The name and taxpayer identification number of the taxpayer making the
election;
(2) For each property placed in service in the taxable year for which an election
under this section 7 is being made:
(a) The street address, city, state, zip code, and a description of the property;
(b) The total unadjusted depreciable basis of the property;
(c) If the eligible property is less than the entire property, the dollar amount of
unadjusted depreciable basis allocable to the eligible property, and a description that
identifies the eligible property; and
(d) The dollar amount of the unadjusted depreciable basis of eligible property the
taxpayer is designating as QPP (or a statement that the taxpayer is designating the
entire unadjusted depreciable basis of the eligible property as QPP);
(3) If the taxpayer is applying the de minimis rule described in section 4.02(2) of

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this notice to an eligible property, a declaration that the taxpayer is applying the de
minimis rule described in section 4.02(2) of Notice 2026-16 and identification of each
eligible property to which the de minimis rule is applied; and
(4) If the taxpayer is using the automatic one-year extension of the placed-in-
service-date requirement in section 4.11 of this notice—
(a) A declaration that—
(i) The taxpayer is using the automatic one-year extension of the placed-in-
service-date requirement in section 4.11 of Notice 2026-16; and
(ii) Each property for which the taxpayer is using the automatic one-year
extension was located in a disaster area for all or a portion of 2030; and
(b) Identification of each eligible property listed under section 7.02(2) of this
notice for which the taxpayer is using the automatic one-year extension of the placed-in-
service-date requirement in section 4.11 of this notice, and identification of the federally
declared disaster (as defined in § 165(i)(5)) that established the disaster area applicable
to each eligible property.
.03 Revocation. Any election made under section 7 of this notice, and any
designation under section 4.09 of this notice contained in such election, may be revoked
only by filing a request for a private letter ruling and obtaining the written consent of the
Secretary. The Secretary will provide consent only in extraordinary circumstances. See
§ 168(n)(6)(B). If the request for revocation would allow a taxpayer to use hindsight, the
extraordinary circumstances standard is not met.
SECTION 8. DEPRECIATION RECAPTURE
.01 Defined terms. For purposes of this notice:

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(1) QPP change in use.
(a) In general. A QPP change in use occurs if, at any time within the 10-
calendar-year period beginning on the date a taxpayer places QPP in service, the QPP
(i) ceases to satisfy the integral part requirement, and (ii) is used by the taxpayer in
another productive use that results in the property that was previously QPP constituting
disqualified property (as defined in section 8.01(2) of this notice). Accordingly, a QPP
change in use has not occurred when a taxpayer ceases to use QPP as an integral part
of one QPA and begins to use it as an integral part of another QPA, provided the QPP
was not used in another productive use not described in section 5.01 of this notice in
the interim. If only a portion of QPP undergoes a QPP change in use, this section 8
applies only to the portion that underwent a change in use, provided that the other
portion(s) of the QPP continue to meet the requirements of section 4.01 of this notice.
(b) Special rule for consolidated groups. For QPP subject to an intercompany
lease described in section 4.02(3)(b) of this notice, if B ceases to have a QPA that is
conducted in, or takes place within, the QPP, or if S or B leaves the consolidated group,
then S has a QPP change in use.
(c) Leases to commonly controlled persons. For QPP subject to a lease
agreement between a lessor pass-through entity and a commonly controlled person, or
between a lessor individual and a commonly controlled person, if the commonly
controlled person leasing the QPP ceases to have a QPA that is conducted in, or takes
place within, the QPP, or if the commonly controlled person is no longer described in
section 4.02(3)(c) of this notice for any taxable year, the lessor pass-through entity or
lessor individual, as applicable, has a QPP change in use.

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(d) Temporarily idle property. A property that has been placed in service but is
temporarily idle does not cease to satisfy the integral part requirement and does not
have a QPP change in use. For this purpose, property is temporarily idle when the
taxpayer takes it out of service for a finite period with the expectation of resuming a QPA
in the near future (for example, property taken out of service while upgrading a
production line or performing facility-wide maintenance).
(2) Disqualified property. The term disqualified property refers to QPP that
underwent a QPP change in use and is no longer QPP. Disqualified property includes
only the portion of the QPP that underwent a QPP change in use.
(3) Year of change. The term year of change refers to the taxable year in which a
QPP change in use occurs.
.02 Application of § 1245(a)(1) upon a QPP change in use. Disqualified property is
subject to § 1245(a)(1) and is treated as having been disposed of by the taxpayer as of
the first time the property had a QPP change in use. Upon such QPP change in use,
the excess of the recomputed basis (as defined in § 1245(a)(2)) of the disqualified
property over the adjusted basis (as defined in § 1011(a)) of the disqualified property is
treated as ordinary income in the year of change. To determine the recomputed basis
of disqualified property, see section 8.05 of this notice.
.03 Adjustment to basis of property for gain recognized upon a change in use. The
taxpayer’s basis in disqualified property is increased by the amount of gain recognized
under section 8.02 of this notice. Solely for purposes of determining the depreciation
allowance for disqualified property after a QPP change in use, the adjustment to basis
in this section 8.03 is treated as having occurred on the first day of the year of change.

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.04 Determination of depreciation allowance for disqualified property. The
depreciation allowance for disqualified property in the year of change and all
subsequent taxable years is determined as though the disqualified property was placed
in service by the taxpayer as a new separate asset on the first day of the year of
change, taking into account the applicable convention.
.05 Determination of recomputed basis of disqualified property.
(1) In general. For purposes of applying § 1245(a)(1), the recomputed basis of
disqualified property shall be determined by multiplying the eligible property’s
unadjusted depreciable basis designated as QPP by the percentage of the eligible
property that underwent a change in use (as determined under section 8.05(2) of this
notice). For example, assume that the entire eligible property had an unadjusted
depreciable basis of $100, and the taxpayer elected to designate $80 of it as QPP. If
50% of the eligible property undergoes a change in use, the recomputed basis of the
disqualified property under § 1245(a)(2) equals $40 (50% of $80).
(2) Determination of percentage of eligible property that underwent change in use.
A taxpayer may determine the portion of the eligible property (expressed as a
percentage) that underwent a change in use using any reasonable method that takes
into account the data and criteria described in section 4.08 of this notice. A taxpayer
must use the same method of determining the portion of eligible property that
underwent a change in use consistently for any subsequent partial changes in use with
respect to the same eligible property.
(3) Unit-of-property determination after a partial change in use. Solely for
purposes of determining whether the remaining eligible property continues to be used

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as an integral part of a QPA and has not experienced a QPP change in use, the rules in
section 4.03 of this notice are applied by disregarding the eligible property that
underwent a change in use.
.06 Ineligibility for certain elections. Disqualified property is not eligible in the year of
change for the election provided under § 179, the additional first year depreciation
deduction provided in § 168(k), or the special depreciation allowances under §§ 168(l)
and 168(m).
.07 Examples. The following examples illustrate the rules set forth in section 8 of
this notice:
(1) Example 1.
(a) Facts. Company A, a calendar-year taxpayer, places a 50,000 square-foot
factory (Factory A) consisting entirely of eligible property in service on January 1, 2027,
and elects under section 7 of this notice to designate the entire $10,000,000 unadjusted
depreciable basis of Factory A as QPP. Company A’s special depreciation allowance
under § 168(n) for the 2027 taxable year is $10,000,000, and Company A’s adjusted
basis in the QPP is $0 as of January 1, 2028. From January 1, 2027, to December 19,
2032, Company A uses the QPP as an integral part of a QPA. However, during the
remaining portion of the taxable year ending December 31, 2032 (the 2032 taxable
year), Company A ceases using the property as an integral part of a QPA and begins
using the property in another productive use that is not a QPA.
(b) Analysis. Under section 8.01(1)(a) of this notice, Company A’s QPP
underwent a QPP change in use in the 2032 taxable year and became disqualified
property when Company A ceased using the QPP as an integral part of a QPA and

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began using the property in another productive use. Under section 8.02 of this notice,
Company A is treated as disposing of the QPP and recognizes a gain of $10,000,000 in
the 2032 taxable year which is treated as ordinary income. Under section 8.03 of this
notice, Company A’s adjusted basis of $0 in the disqualified property is increased by
$10,000,000 as of January 1, 2032, for purposes of determining the depreciation
allowance for the disqualified property starting in the 2032 taxable year.
Under section 8.04 of this notice, Company A determines its depreciation
allowance for the disqualified property in the year of change and all subsequent taxable
years by treating the disqualified property as a new separate asset placed in service on
the first day of the year of change, taking into account the applicable convention. As the
disqualified property is nonresidential real property, the depreciation allowance is
determined using the straight line method under § 168(b)(3) and the mid-month
convention under § 168(d)(2). Accordingly, for the 2032 taxable year, Company A has a
depreciation allowance of $245,726, equal to the unadjusted basis of $10,000,000
divided by 39 years, times 11.5 divided by 12 months.
(2) Example 2.
(a) Facts. The facts are the same as in Example 1, except (i) Company A only
designated $8,000,000 of Factory A’s unadjusted depreciable basis as QPP, and
(ii) during the remaining portion of the 2032 taxable year, only 25,000 square feet of
Factory A underwent a change in use. Assume Company A’s determination that only
25,000 square feet of Factory A underwent a change in use was made in accordance
with section 8.05(2) of this notice, and that the remaining 25,000 square feet of Factory
A continue to meet the requirements of section 4.01 of this notice without regard to the

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25,000 square feet that underwent a change in use.
(b) Analysis.
(i) Section 1245 gain. Under section 8.05(1) of this notice, for purposes of
applying § 1245(a)(1), the recomputed basis of Factory A’s disqualified property equals
$4,000,000 (the $8,000,000 of the eligible property’s unadjusted depreciable basis
designated as QPP by Factory A, multiplied by 50 percent, which is the percentage of
the eligible property that underwent a change in use, calculated based on Company A’s
reasonable determination that 25,000 square feet of Factory A underwent a change in
use). Under section 8.02 of this notice, Company A is treated as disposing of the
portion of Factory A that is disqualified property and recognizes a gain of $4,000,000 in
the 2032 taxable year which is treated as ordinary income.
(ii) Basis of disqualified property. Under section 8.03 of this notice, the
disqualified property in Factory A is treated as a new, separate asset, and Company A’s
adjusted basis of $0 in the disqualified property is increased by $4,000,000 as of
January 1, 2032, for purposes of determining the depreciation allowance for the
disqualified property starting in the 2032 taxable year.
(iii) Depreciation allowances for disqualified property. Under section 8.04 of
this notice, Company A determines its depreciation allowance for the disqualified
property in the year of change and all subsequent taxable years by treating the
disqualified property as placed in service on the first day of the year of change, taking
into account the applicable convention. As the disqualified property is nonresidential
real property, the depreciation allowance is determined using the straight line method
under § 168(b)(3) and the mid-month convention under § 168(d)(2). Accordingly, for the

47

2032 taxable year, Company A has a depreciation allowance of $98,291, equal to the
unadjusted basis of $4,000,000 divided by 39 years, times 11.5 divided by 12 months.
(iv) Depreciation allowances for portion(s) of property not designated as QPP.
Under section 8.01(1)(a) of this notice, the rules in section 8 of this notice do not apply
to the portion(s) of Factory A not designated as QPP (undesignated property).
Therefore, the undesignated property is not treated as undergoing a QPP change in
use, even though Company A began using part or all of the undesignated property in
another productive use. Instead, the undesignated property continues to be
depreciated using the applicable depreciation method, recovery period, and convention.
.08 Change in use by a transferee following a fully or partially tax-free transfer of
QPP. For purposes of applying this section 8 to a change in use by a transferee
following a fully or partially tax-free transfer of QPP, a taxpayer applies rules consistent
with §§ 1.1245-2(a)(4) and (c)(2), and 1.1245-4(c).
SECTION 9. APPLICABILITY DATE AND RELIANCE
It is anticipated that the forthcoming proposed regulations will provide that rules
consistent with the interim guidance provided in sections 3 through 8 of this notice apply
to property the construction of which begins after January 19, 2025 (or, in the case of
property described in section 4.06 of this notice, that is acquired after January 19,
2025), and which is placed in service in a taxable year beginning on or after the date the
final § 168(n) regulations are published in the Federal Register. For property the
construction of which begins after January 19, 2025 (or, in the case of property
described in section 4.06 of this notice, that is acquired after January 19, 2025), and is
placed in service in a taxable year beginning before the date the forthcoming proposed

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regulations are published in the Federal Register or other published guidance is issued,
a taxpayer may rely on the guidance provided in sections 3 through 8 of this notice,
provided that the taxpayer follows the guidance provided in sections 3 through 8 of this
notice in its entirety for all QPP placed in service in such taxable years, beginning with
the first taxable year with respect to which the taxpayer relies on the guidance provided
in sections 3 through 8 of this notice.
SECTION 10. REQUEST FOR COMMENTS
.01 Comments regarding guidance provided in this notice. The Treasury Department
and the IRS request comments on questions arising from the interim guidance set forth
in this notice. Commenters are encouraged to specify the issues on which additional
guidance is needed in the forthcoming proposed regulations. In addition to general
comments regarding the provisions of this notice, the Treasury Department and the IRS
request comments to address the following specific questions:
(1) Allocation of basis to eligible property (section 4.08 of this notice). What are
some other examples of reasonable methods to allocate a property’s basis between
eligible property and ineligible property?
(2) Manufacturing, chemical production, agricultural production, or refining (section
5 of this notice). Are the definitions for manufacturing, chemical production, agricultural
production, and refining representative of their respective industries? Should the
definitions, or the examples, in section 5 of this notice be expanded to include additional
activities or examples, and if so, which activities or examples?
(3) Examples of substantial transformation of property (section 5.02(9) of this
notice). What other examples of activities that are, or are not, manufacturing,

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production, or refining that result in substantial transformation of property comprising a
qualified product would be helpful to include in the forthcoming proposed regulations?
.02 Procedures for submitting comments.
(1) Deadline. Written comments should be submitted by April 20, 2026.
Consideration will be given, however, to any written comment submitted after April 20,
2026, if such consideration will not delay the issuance of forthcoming proposed
regulations.
(2) Form and manner. The subject line for the comments should include a
reference to Notice 2026-16. All commenters are strongly encouraged to submit
comments electronically. However, comments may be submitted in one of two ways:
(a) Electronically via the Federal eRulemaking Portal at www.regulations.gov
(type IRS-2026-0016 in the search field on the regulations.gov homepage to find this
notice and submit comments); or
(b) By mail to: Internal Revenue Service, CC:PA:LPD:PR (Notice 2026-16),
Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, D.C., 20044.
(3) Publication of comments. The Treasury Department and the IRS will publish
for public availability any comment submitted electronically and on paper to its public
docket on regulations.gov.
SECTION 11. PAPERWORK REDUCTION ACT
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA) generally
requires that a Federal agency obtain the approval of the Office of Management and
Budget (OMB) before collecting information from the public, whether such collection of
information is mandatory, voluntary, or required to obtain or retain a benefit. An agency

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may not conduct or sponsor, and a person is not required to respond to, a collection of
information unless it displays a valid control number assigned by the OMB.
The collections of information in this revenue procedure are in section 7. These
collections of information include recordkeeping requirements that are necessary to
determine whether a taxpayer properly elected to claim the special depreciation
allowance for QPP under § 168(n), properly designated the property subject to the
election, and the amount of the allowance. These collections will be used by the IRS for
tax compliance purposes and by taxpayers to calculate their deduction.
These collection requirements will be included in the OMB Control Number 1545-
0074 for individual filers, 1545-0123 for business filers, 1545-0092 for trust and estate
filers, and 1545-0047 for tax-exempt filers, in accordance with the PRA (44 U.S.C.
3507).
SECTION 12. DRAFTING AND CONTACT INFORMATION
The principal author of this notice is Jeremy Pfeifer of the Office of the Associate
Chief Counsel (Income Tax and Accounting). However, additional personnel in the
Office of Chief Counsel and at the Treasury Department participated in the development
of this notice. For further information, please contact the Office of Associate Chief
Counsel (Income Tax and Accounting), Branch 7, at (202) 317-7005 (not a toll-free
number).