The U.S. Internal Revenue Service (IRS) has issued new guidance providing businesses with a clearer pathway to benefit from a significant tax break under the One Big Beautiful Bill (OBBB). This special provision allows companies involved in production to take full advantage of an up to 100% depreciation write-off on certain properties. The IRS’s detailed explanation, outlined in Notice 2026-16, opens the door for businesses to make the most of this tax incentive, which targets new manufacturing investments and the construction of production facilities.
Understanding the New IRS Tax Break: What You Need to Know
The new IRS guidance, issued to clarify the special depreciation allowance under the One Big Beautiful Bill, is set to impact businesses involved in manufacturing, agriculture, chemical production, and refining. According to Newsweek, this provision allows businesses to immediately write off up to 100% of the unadjusted depreciable basis of qualified production property when it is placed into service. The intention behind this provision is to encourage companies to invest in modernizing and expanding their production facilities, ultimately helping to boost the American manufacturing sector.
As stated by the IRS:
“Notice 2026-16 announces that Treasury and the IRS will issue proposed regulations on a new provision of the law allowing taxpayers to elect to take a depreciation deduction up to 100 percent of the unadjusted depreciable basis of any qualified production property placed in service during a taxable year.”
This change aims to streamline the process for businesses to access the tax break, enabling them to apply the benefit more easily during their tax filings.
Qualified Production Property: What Does It Include?
The IRS has outlined specific criteria for what constitutes “qualified production property” eligible for the depreciation benefit. According to the guidance, qualified production property refers primarily to nonresidential real property used by a taxpayer in the course of a qualified production activity. These activities are not limited to manufacturing but also include chemical production, agricultural production, and refining, sectors that are central to economic development and sustainability.
“A qualified production activity is a manufacturing, chemical production, agricultural production, or refining activity that results in the substantial transformation of the property comprising a qualified product,” the IRS explained.
This substantial transformation requirement ensures that the property involved in these activities directly contributes to the production of a finished product, aligning with the overall goal of driving U.S. production capabilities forward.
The allowance is available to businesses that meet these definitions and engage in qualifying production activities. This means that not all real estate or property involved in production will qualify, but those that do meet the strict requirements will benefit from the opportunity to fully depreciate the property in the year it is placed into service.
Timeframe for the Special Depreciation Allowance: Key Deadlines
While this tax break presents a unique opportunity for businesses to significantly reduce their tax burden, there are important timeframes to consider. The special depreciation allowance only applies to qualified production property placed in service between July 4, 2025, and January 1, 2031. This critical deadline provides a limited window for companies to take full advantage of this provision.
“In addition to other requirements, the special depreciation allowance only applies to qualified production property placed in service after July 4, 2025, and before Jan. 1, 2031,” the IRS emphasized.
This deadline means that businesses looking to invest in production facilities must carefully plan their capital expenditures to ensure they are eligible for the full benefit.
For many companies, this creates a sense of urgency to modernize or expand their facilities in order to qualify for the write-off. Whether it’s building new factories or upgrading existing production lines, the timing of these investments will be key to taking advantage of the allowance.
Impact on the U.S. Manufacturing Sector and Economy
The introduction of this new tax break is expected to have a far-reaching impact on the U.S. manufacturing sector. By providing businesses with a significant incentive to invest in production facilities, the government is encouraging the development of new manufacturing capabilities across the country. This is especially important in light of the ongoing push to bring more manufacturing jobs back to the U.S. and reduce reliance on overseas production.
The IRS guidance clarifies how businesses can use the special depreciation allowance to accelerate their investment in production, which could lead to faster expansion, increased job creation, and higher productivity. By offering this tax incentive, the government aims to foster economic growth, particularly in industries that contribute to the transformation and innovation of American-made goods.
