IRS Notice 2026-16: Qualified Production Property Guidance Explained

IRS Notice 2016-16 was issued to provide guidance on Section 168(e)(3)(E), which established the Qualified Production Property classification and 20-year recovery period. The notice translates statutory language into operational requirements, clarifies ambiguities, and provides examples to help manufacturers and tax practitioners determine property eligibility.

The notice addresses key questions about production use percentage thresholds, qualifying activity definitions, structural integration requirements, and documentation standards. Understanding theIRS Notice 2016-16 summary is essential for property owners evaluating QPP treatment, as the notice forms the technical foundation for compliance and audit defense.

IRS Notice 2026-16 represents an updated release that incorporates lessons from years of implementation, addresses practitioner questions, and clarifies positions based on examination experience. For context on how QPP fits into broader depreciation planning, refer to the Qualified Production Property overview.

One of the most important provisions in the notice is the production use percentage threshold. The notice establishes that a specified percentage of the building must be used for qualifying production activities to achieve QPP classification. This threshold prevents buildings with incidental production use from qualifying for the accelerated recovery period.

The QPP IRS guidance 2026 clarifies the computation methodology for determining the production use percentage. The calculation typically compares production square footage to total building square footage, with adjustments for certain integrated support areas. The notice provides examples showing how to classify borderline areas and calculate the percentage for mixed-use facilities.

The notice defines qualifying production activities as manufacturing, production, extraction, and furnishing of certain utilities. Qualified Production Property IRS clarification emphasizes that the building must be used in the actual production process, not merely owned by a manufacturing company or located on a manufacturing campus.

Manufacturing includes fabrication, assembly, processing, and production of tangible personal property. Extraction covers mining, drilling, and natural resource recovery. Qualifying utility operations include electricity generation and certain natural gas production. The notice excludes activities like warehousing, distribution, retail, and general administration.

The distinction is functional, not industry-based. A building used by a manufacturer for office work does not qualify, even though the company engages in qualifying production activities elsewhere. Conversely, a contract manufacturer without ownership of the final product can still qualify if the building is used for actual production work.

The notice requires that the building be integral to the production process, meaning it is designed, constructed, or substantially modified to support manufacturing operations. Generic commercial buildings repurposed for production without structural modifications typically do not meet this test.

Evidence of structural integration includes specialized building systems (heavy electrical service, industrial HVAC, reinforced structural supports), production-specific layouts, equipment integration features, and design elements tailored to the manufacturing process. The notice provides examples of structures that demonstrate the required integration versus generic buildings that fail the test.

Structural Integration Indicators

• Specialized Systems: Industrial electrical, HVAC designed for production environment, process-specific utilities.
• Layout Design: Floor plan optimized for production workflow, equipment placement, material flow.
• Structural Features: Reinforced floors for equipment loads, high bay ceilings, crane systems, specialized foundations.
• Production-Specific Elements: Ventilation for manufacturing processes, cleanroom construction, explosion-proof features.

Notice 2026-16 depreciation rules are illustrated through computational examples in the notice. These examples demonstrate how to apply the production use percentage test, allocate square footage in mixed-use buildings, and determine qualification for facilities with both production and non-production areas.

One example shows a 100,000 square foot building with 70,000 square feet of production floor, 10,000 square feet of integrated quality control, 15,000 square feet of administrative offices, and 5,000 square feet of finished goods storage. The calculation includes production and integrated QC (80,000 square feet) and excludes offices and storage (20,000 square feet), resulting in 80% production use.

Another example addresses a building constructed as a manufacturing facility but with significant office space. The notice clarifies that even purpose-built manufacturing buildings must meet the production use percentage test, and substantial non-production areas can disqualify the property or require allocation between QPP and standard 39-year treatment.

The notice establishes documentation expectations for supporting QPP elections. Property owners should maintain contemporaneous records demonstrating compliance with each requirement, including building plans, operational use descriptions, production use percentage calculations, and engineering analysis of structural integration.

QPP tax compliance update guidance emphasizes the importance of contemporaneous documentation prepared at the time the election is made, rather than reconstructing records years later if examined. Many manufacturers engage engineering firms to prepare QPP qualification studies that document compliance and provide technical support for the position.

Recommended Documentation

• Architectural Plans: Building layouts showing production areas, support spaces, and use allocations.
• Engineering Analysis: Evaluation of structural integration, specialized systems, and production-specific design.
• Operational Records: Description of production activities, workflow, and building use.
• Use Percentage Calculation: Square footage allocations with supporting methodology and classification rationale.
• Placed in Service Evidence: Permits, certificates, acquisition documents establishing the relevant date.

Complying with Notice 2016-16 requires careful analysis and thorough documentation. Property owners should evaluate eligibility before claiming QPP treatment, prepare supporting documentation contemporaneously, and be prepared to defend the position if examined. Taking aggressive positions inconsistent with the notice creates significant audit risk.

For detailed information on comparing QPP to other depreciation strategies, see QPP vs Cost Segregation: Key Differences. For broader depreciation planning context, refer to the cost segregation overview.