The IRS released Notice 2026-16 on February 20, previewing proposed regulations under new IRC §168(n), created by the One Big Beautiful Bill Act. Here's what matters for your clients right now.
The Big Picture
Section 168(n) is essentially bonus depreciation for buildings, specifically, factories and facilities where taxpayers conduct qualified production activities. Like §168(k), it allows an immediate deduction of the full cost. Unlike §168(k), it's elective and limited to domestic production property. This is a significant opportunity for manufacturing, construction, and processing clients, but the rules have precise distinctions.
Who Qualifies
Qualified production property is real property where the taxpayer performs an integral part of a qualified production activity, such as in manufacturing, production, or refining, that results in a substantial transformation of a product. The IRS defines this as creating "a final, complete, and distinct item of property that is fundamentally different from the original constituent elements."
Activities that don't qualify: packaging, repacking, minor assembly, labeling, or bundling finished goods into gift sets. If your client is asking whether their warehouse operation qualifies, the answer is almost certainly no.
The Lease Problem and the Fix
A major concern was the lease rule: one entity can't claim the deduction by using another entity's qualified production activity. This was a headache for clients who separate their real estate and operating entities.
Good news: the notice carves out two exceptions; one for consolidated groups and one for commonly controlled passthrough entities. In those situations, the property-holding entity and the operating entity can be treated as one. If your client has this structure, document the common control carefully.
Allocating the Building's Basis
If a building has both qualified and nonqualified uses, taxpayers must allocate the basis between them. However, there's a 95% de minimis rule. If at least 95% of the building qualifies, no allocation is required. Any reasonable allocation method is acceptable; the notice gives examples of methods that work and some that don't.
Key distinction: storing raw materials is a qualified use. Warehousing finished products is not. If your client's building does both, that allocation matters.
How to Make the Election
Clients elect §168(n) by attaching a statement to a timely filed original return. This is not reversible without a letter ruling, so make sure clients are intentional about this decision before filing.
Recapture Watch
If a building stops being used for qualified production within 10 years of being placed in service, recapture applies. Changing the type of qualified production within the building is fine, but if the lessor or lessee exits a common control group, that triggers recapture under the lease exception rules.
Transition Relief
Taxpayers who filed before the notice came out can rely on NAICS codes as a safe harbor. Going forward, the proposed regulations apply to property placed in service in tax years beginning after the final regs are published. Until then, clients can rely on this notice as long as they follow all of its rules, not just the favorable ones.
Christine Gervais is a licensed CPA, using her skills to help businesses grow and achieve their fullest potential. Christine has a Master’s degree in accounting from Southern New Hampshire University in addition to holding her CPA license for over a decade. Notably, Christine is a nationally recognized speaker providing education to other CPAs on how to best serve clients as well as instruction on a wide variety of topics for business owners on how to maximize success. Christine prides herself on the value she can bring to clients with her extensive tax knowledge and provides strategic, forward-thinking financial strategies to help clients grow. When not behind her desk, you can find Christine spending quality time with her daughter and stepson or tending to the family’s excessively loved farm animals.
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