The IRC §168(n) special depreciation deduction for qualified production property allows taxpayers to claim a 100% depreciation allowance for certain real property placed in service after July 4, 2025, and before January 1, 2031. Eligible property must be used in qualified production activity and meet other specified criteria.
New taxpayer-friendly guidance issued by the IRS, which may be relied upon while proposed regulations are promulgated, provides clarity to many unanswered questions regarding this new deduction. (IRS Notice 2026-16)
Highlights of the guidance clarify that:
- To qualify, the property (or portion of the property) must be an integral part of a qualified production activity, defined as at least 95% of the property’s space is used in the activity;
- Improvements and additions made to existing property can be treated as qualified production property;
- Lessors are generally not eligible to claim the deduction, but an exception is available if the lessor and lessee are under common control or members of a consolidated group;
- Taxpayers can designate on an election the entire unadjusted depreciable basis of eligible property as qualified production property or a designated specific dollar amount (up to the amount of the property’s unadjusted basis); and
- For the 2025 tax year only, taxpayers can establish that they are engaged in a qualified activity if the principal business activity code that the taxpayer lists on its 2025 federal income tax return is any of the NAICS codes listed under sectors 31, 32, or 33, or under subsectors 111 or 112, that appear in the 2022 North American Industry Classification System (NAICS) Manual (2022).
The guidance provides numerous examples of the concepts listed above, and outlines how a taxpayer makes the election to claim the deduction and when and how the deduction is subject to recapture.
Sign up for Spidell’s 2026 Post-Tax Season Update and Review webinar to review, refresh, and arm yourself to tackle extensions. Click here and register today.
