Notice 2026-16 — Interim Guidance on 168(n) Qualified Production Property

Where this comes from

The OBBBA created Section 168(n) in July 2025, giving manufacturers an elective 100% deduction on qualifying production buildings. But the new law left many questions open: what counts as a qualified production activity? How do you allocate a building that has both production and office space? When does construction officially begin?

Notice 2026-16, issued February 20, 2026, answers those questions with interim guidance. Proposed regulations will follow. Until then, taxpayers may rely on the notice.

What it says

The notice defines qualified production activities broadly as manufacturing, production, and refining. But it draws clear lines. Packaging, labeling, and minor assembly do not qualify. Offices, parking areas, sales spaces, R&D labs, and storage for finished goods waiting to be shipped are all excluded.

To qualify, space must be an integral part of the production activity. Integral means directly connected and essential to the process. A production floor qualifies. A conference room does not.

For mixed-use buildings, the 95% rule applies. If excluded uses are 5% or less of the building, the whole building can qualify. Above that, you must allocate, and the allocation must be documented carefully.

The notice covers begin-construction rules, election mechanics, and the 10-year Section 1245 recapture rule that applies if qualified production use stops within 10 years.

How it shows up in a study

A Section 168(n) claim lives or dies on the quality of its allocation documentation. The IRS will want to see which square footage and which portion of building cost served qualified production and which did not. That is exactly the work a cost segregation engineer performs.

A study built to satisfy Notice 2026-16 measures the building, documents each area's use, assigns costs to each portion, and produces the record needed to defend the election on exam. For manufacturing clients, expanding a study's scope to cover this notice is the foundation of a defensible claim.

What it does not mean

This notice is interim guidance, not final regulations. The IRS reserved the right to modify the rules in proposed regulations. Taxpayers can rely on it now, but the final rules may differ.

The notice also does not make the election automatic or risk-free. The irrevocable election and the 10-year recapture rule mean this is a decision that requires careful planning. Documentation errors or changes in business use after the election can create unexpected income.