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100% Depreciation for Qualified Production Property

Treasury & IRS Issue Interim Guidance Under the One, Big, Beautiful Bill (IR-2026-25)

On February 20, 2026, the U.S. Treasury Department and the IRS released Notice 2026-16, providing interim guidance on a powerful new tax incentive created under the One, Big, Beautiful Bill (OBBBA).

The new rule allows taxpayers to elect up to 100% immediate depreciation for certain qualified production property placed in service between:

July 4, 2025 and December 31, 2030

This is a major development for manufacturers, production facilities, agricultural operators, and certain vertically integrated businesses.

At Velin & Associates, Inc., CPA Los Angeles, we are already reviewing how this provision may benefit clients expanding production capacity, opening new facilities, or investing in industrial real estate.

Below is a detailed breakdown of what this means and how it may apply.

What Is the New Special Depreciation Allowance?

The new law permits taxpayers to deduct up to 100% of the unadjusted depreciable basis of certain qualified production property in the year it is placed in service.

In practical terms:

Instead of depreciating qualifying real property over 39 years (standard nonresidential real estate life), a taxpayer may be able to deduct the entire cost immediately.

This is separate from Section 179 and traditional bonus depreciation.

What Qualifies as “Qualified Production Property”?

According to Notice 2026-16, qualified production property generally must be:

What Is a “Qualified Production Activity”?

The activity must involve:

And it must result in the substantial transformation of property into a qualified product.

This “substantial transformation” standard is critical.

Mere assembly, packaging, storage, or distribution does NOT qualify.

Examples for Our Los Angeles Audience

Example 1 – Manufacturing Facility Expansion

A Los Angeles-based cosmetics manufacturer builds a new production facility costing $4 million.

The facility is used to mix, process, and manufacture finished skincare products from raw chemical inputs.

Because this involves substantial transformation in a manufacturing activity, the building may qualify for the 100% special depreciation election.

Result:
The company may deduct the full $4 million in the year placed in service instead of depreciating over 39 years.

Tax impact:
At a 37% federal rate, this could generate nearly $1.5 million in immediate tax savings.

Example 2 – Agricultural Processing

A California agricultural business constructs a facility to process raw almonds into packaged consumer-ready products.

If the activity qualifies as substantial transformation (beyond simple sorting or packaging), the facility may qualify.

Example 3 – What Does NOT Qualify?

An Amazon Business seller builds a warehouse solely for storage and distribution.

Because storage and distribution do not constitute manufacturing or substantial transformation, the building likely does NOT qualify.

This distinction is extremely important.

Election Requirement – It’s Not Automatic

The 100% deduction is elective.

Taxpayers must affirmatively elect to treat the property as qualified production property.

Notice 2026-16 provides guidance on:

Failure to properly elect may result in losing the benefit.

Depreciation Recapture Risk

The IRS also clarified how recapture applies if the property later ceases to qualify.

If:

Depreciation recapture rules may apply.

This could trigger taxable income in future years.

Strategic planning is critical before making the election.

How This Differs From Bonus Depreciation

Traditional bonus depreciation typically applies to:

This new provision applies to:

That is a significant expansion.

Historically, buildings have not qualified for full immediate expensing.

Who May Benefit Most?

This provision may benefit:

For clients classified as:

E-Commerce
High Net Worth Individuals
Business Owners

This could dramatically alter capital expenditure planning.

Strategic Planning Considerations

  1. Timing Matters

Property must be placed in service:

After July 4, 2025
Before January 1, 2031

Delays beyond 2030 could eliminate eligibility.

  1. “Substantial Transformation” Analysis

Businesses must carefully analyze whether their activity truly qualifies.

The IRS has requested comments and may issue further guidance in proposed regulations.

Documentation of production processes will be critical.

  1. Interaction With Other Incentives

Businesses may also be eligible for:

Coordination is necessary to maximize benefits without unintended consequences.

What Treasury & IRS Announced

Notice 2026-16 is interim guidance.

Treasury and the IRS announced they will issue proposed regulations.

Taxpayers may rely on the Notice until final regulations are issued.

The IRS is requesting public comments within 60 days regarding:

This suggests further clarification is forthcoming.

California Considerations

California does not automatically conform to all federal depreciation provisions.

Businesses operating in Los Angeles and throughout California must:

This can materially impact cash flow projections.

Why This Matters for Growth-Focused Businesses

For growing production businesses, immediate 100% depreciation:

For high-income owners, it may significantly reduce current-year federal tax liability.

However, acceleration today may mean lower depreciation deductions in future years.

Strategic modeling is essential.

Final Thoughts

The new special depreciation allowance for qualified production property represents one of the most significant real estate-related tax incentives enacted in recent years.

But eligibility is narrow and technical.

If you are:

You should evaluate whether this election applies to your business.

For more information about our tax planning services, contact us today: visit our website.

Velin & Associates, Inc

8159 Santa Monica Blvd STE 198/200 West Hollywood, CA 90046
323-902-1000
dmitriy@losangelescpa.org

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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.

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