IRS Notice 2026-16 Opens 100% Expensing for Factories, Farms and Refineries

The Treasury Department and the IRS on February 20, 2026, released Notice 2026-16, the first detailed guidance on the 100% special depreciation allowance for qualified production property created by the 2025 tax law. The provision lets manufacturers, processors and other producers write off the cost of certain factory, refinery and farm buildings in the year the property is placed in service, instead of depreciating them over the usual 39-year schedule for nonresidential real estate. For owners expanding domestic production, the notice answers what counts as qualifying space, how long the window stays open and what triggers a costly clawback later.

What changed

Qualified production property, according to the notice, is nonresidential real property used as an integral part of a qualified production activity: manufacturing, chemical production, agricultural production or refining that results in the substantial transformation of raw materials, inputs or components into an entirely different product, per a summary of the notice by EisnerAmper. Eligible building systems include HVAC, electrical and plumbing infrastructure, permanently affixed fire protection, built-in cranes, hoists and conveyor systems, and space used to store raw materials or components. Retail space, offices, software-development areas, parking, minor assembly or labeling areas and storage for finished goods do not qualify, EisnerAmper reported. A de minimis rule lets an entire building qualify if 95% or more of its physical space meets the test, according to RSM US.

Timing and who can use it

Two clocks matter, per RSM's reading of the notice. Construction must begin after January 19, 2025, and before January 1, 2029. The property must be placed in service after July 4, 2025, and before January 1, 2031, with a safe harbor for property placed in service between July 5 and December 31, 2025, according to EisnerAmper. Used property can qualify too, if it was acquired after January 19, 2025, and was not used in a qualified production activity by anyone between January 1, 2021, and May 12, 2025 — a rule aimed at preventing owners from simply repositioning an existing plant to claim the deduction, RSM noted. The notice also extends the benefit to real estate lessors: an owner who leases a qualifying building to a tenant in the same consolidated group, or under common ownership of at least 50%, can still claim the allowance, according to EisnerAmper.

The after-tax math

Example, with round numbers: a manufacturer spends $10 million on a new production building in 2026. An engineering review finds that $8 million of the cost is attributable to the production floor and the qualifying building systems inside it, while $2 million covers an office wing and a finished-goods warehouse that do not meet the test. Because the qualifying share falls short of the 95% de minimis threshold, the two portions are depreciated separately.

At a 37% marginal rate on pass-through business income, the $8 million write-off is worth roughly $2,960,000 in reduced tax in the placed-in-service year, compared with a deduction spread over more than three decades under ordinary rules. The deduction changes timing, not the total amount ultimately deducted, and its value to a given owner still depends on other income, basis and any passive-activity limits.

The recapture trap

The notice applies Section 1245 recapture principles plus an additional rule specific to this deduction: if the property stops being used as an integral part of a qualified production activity within 10 years of being placed in service, the owner must recapture the previously claimed deduction as ordinary income, according to both EisnerAmper and RSM. In the example above, if the manufacturer converts the production floor into a distribution center in year six, the $8 million benefit — or the portion tied to the space that changed use — comes back onto the return as ordinary income in that later year, without the benefit of capital-gains rates. Owners planning a sale, a lease restructuring or a shift in how a facility is used inside the 10-year window face the same exposure.

What to watch

Notice 2026-16 is interim guidance while Treasury and the IRS draft proposed regulations, and the agencies are accepting comments for 60 days after the notice's release, per the IRS announcement. RSM flagged an added planning wrinkle: improvements or additions to an existing building can be treated as a separate unit of property, which may let owners of older facilities qualify for capital projects that fall inside the construction and placed-in-service windows even if the building itself does not. Business owners weighing a new production facility, or capital improvements to an existing one, will want engineering and cost documentation in hand well before the return is filed, since the allocation between qualifying and non-qualifying space drives the entire calculation.

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