The OBBBA (One Big Beautiful Bill Act, signed July 4, 2025) created IRC Section 168(n), a manufacturing incentive that allows 100% first-year expensing of new domestic production facilities. For a business building a $10 million plant, this means a $10 million deduction in year one instead of waiting 39 years under standard straight-line depreciation.
What Is Qualified Production Property?
Qualified production property is new construction of a domestic facility used primarily for manufacturing, production, or refining tangible personal property in the United States. The building and its structural components qualify.
The OBBBA explicitly excludes these spaces from Section 168(n):
- Offices and administrative areas
- Research and experimentation facilities
- Engineering and software development spaces
- Parking structures and retail sales floors
IRS Notice 2026-16 clarifies that mixed-use buildings must allocate costs between qualifying and non-qualifying portions. Only square footage attributable to direct production activities can be fully expensed under 168(n). Document your cost allocation carefully.
Eligibility: Two Dates That Both Must Be Met
Section 168(n) imposes two timing requirements:
- Construction must begin after January 19, 2025 (the day before Inauguration Day)
- The facility must be placed in service after July 4, 2025 and before January 1, 2031
"Placed in service" means the property is ready and available for its intended use. For a manufacturing facility, this is typically the date a certificate of occupancy is issued and production equipment is operational. Projects begun in early 2025 that will complete before 2031 should qualify if they meet both criteria.
How Much Can You Deduct?
The deduction is straightforward: 100% of the depreciable cost of the qualified production building in the placed-in-service year.
Example: A $5 million qualified facility generates a $5 million deduction. At a 21% corporate tax rate, that produces $1.05 million in year-one tax savings. Under standard 39-year straight-line depreciation, the same building would yield roughly $128,000 per year in deductions, or about $26,900 in annual tax savings. Section 168(n) converts 39 years of incremental deductions into a single year-one benefit.
Recapture Risk: Plan for a 10-Year Hold
Section 168(n) includes a significant recapture provision. If qualified production property is sold within 10 years of being placed in service, the accelerated depreciation is subject to Section 1245 ordinary income recapture rather than the more favorable 25% unrecaptured Section 1250 rate.
Selling a facility three years after claiming a $10 million 168(n) deduction could trigger $10 million of ordinary income, taxed at up to 37%. Build a minimum 10-year hold period into your financial model before electing this deduction.
The Election: Binding Once Made
The Section 168(n) election is made on the tax return for the placed-in-service year. Once made, it cannot be revoked without IRS consent. You may also elect out of 168(n) treatment to preserve the depreciable basis for standard cost recovery. Electing out may make sense if:
- The deduction creates a net operating loss you cannot carry forward usefully
- A sale within 10 years is possible
- The property may convert to a non-qualifying use
Coordinating With Other Incentives
Section 168(k) bonus depreciation: The OBBBA restored 100% bonus depreciation through 2029. Equipment and personal property installed in the facility can be fully expensed separately under 168(k) without affecting the 168(n) election for the building itself.
Cost segregation: Not necessary for the building shell under 168(n), but still valuable for identifying interior improvements and equipment that qualify for separate 168(k) treatment at shorter depreciable lives.
Section 179: Section 179 expensing cannot be used for non-residential real property. Section 168(n) fills that gap specifically for qualifying production facilities.
Have questions about Section 168(n) for your manufacturing project? Contact TS CPA for a free consultation. We respond within the same day.