Entity Setup
Entity Setup Insight: Leveraging the Special Depreciation Allowance for Qualified Production Property
For businesses setting up in manufacturing or production, the IRS interim guidance on 100% depreciation for qualified production property offers major setup advantages.
By NomadicTax Research Team • 5-8 min read • March 20, 2026
## What’s New Under the One Big Beautiful Bill (OBBB)
The One, Big, Beautiful Bill, enacted July 4, 2025, introduced a provision for a **special depreciation allowance**—allowing taxpayers to elect to deduct **100 % of the unadjusted depreciable basis** of certain property placed in service between **July 5, 2025 and December 31, 2030**. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-guidance-on-special-depreciation-allowance-for-qualified-production-property-announce-upcoming-proposed-regulations-under-the-one-big-beautiful-bill?utm_source=openai))
Notice 2026-16 provides **interim guidance** which helps define key terms and election procedures while proposed regulations are being developed. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-guidance-on-special-depreciation-allowance-for-qualified-production-property-announce-upcoming-proposed-regulations-under-the-one-big-beautiful-bill?utm_source=openai))
## Key Definitions and Requirements
- **Qualified production property (QPP)**: Nonresidential real property used as an integral part of a qualified production activity (manufacturing, agriculture, refining, etc.). Property must result in substantial transformation. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-guidance-on-special-depreciation-allowance-for-qualified-production-property-announce-upcoming-proposed-regulations-under-the-one-big-beautiful-bill?utm_source=openai))
- **Qualified production activity**: Activities that turn raw inputs into a product meeting the law’s standards—e.g. manufacturing, chemical, agricultural processing, or refining. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-guidance-on-special-depreciation-allowance-for-qualified-production-property-announce-upcoming-proposed-regulations-under-the-one-big-beautiful-bill?utm_source=openai))
- **Election deadline**: Must be made when the qualified production property is placed in service; specific procedural rules as per Notice 2026-16 apply. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-guidance-on-special-depreciation-allowance-for-qualified-production-property-announce-upcoming-proposed-regulations-under-the-one-big-beautiful-bill?utm_source=openai))
- **Depreciation recapture**: If property drops out of qualification after placement in service, recapture rules will apply. ([irs.gov](https://www.irs.gov/newsroom/treasury-irs-issue-guidance-on-special-depreciation-allowance-for-qualified-production-property-announce-upcoming-proposed-regulations-under-the-one-big-beautiful-bill?utm_source=openai))
## Practical Setup Opportunities
| Scenario | Setup Advice | Why It Matters |
|---|---|---|
| Starting a manufacturing facility now | Ensure planning for property to be QPP by structuring processes to meet substantial transformation and final assembly tests. | Use immediate 100 % depreciation to improve early-year cash flow. |
| Upgrading existing production facility | Time eligible property placed in service after July 4, 2025; if converting or reconstructing property, ensure it meets nonresidential real property usage requirement. | Let deduction boost liquidity during expansion. |
| Structuring entity as a pass-through or C corporation | Both may claim the deduction; but the benefit timing differs depending on taxable basis and income. | C corporations in full tax rate may prefer immediate deduction; pass-through entities may need to manage taxable income to make full use. |
## Actionable Steps for Entity Setup
1. Identify property you expect to qualify as QPP.
2. Start procurement, construction, or assembly **after** July 4, 2025.
3. Keep detailed activity logs showing transformation and use in qualified activity.
4. Elect the special depreciation in the first year the property is placed in service.
5. Coordinate with tax advisors on entity structure to maximize deduction timing.
## Example Case
A food processing startup places in service nonresidential real property (e.g. processing equipment) in August 2025 for agricultural processing—this qualifies as a QPP. The company elects the 100 % depreciation and claims the full basis cost as a deduction, reducing its first-year taxable income significantly. If the property later is repurposed, recapture comes into play.
## Potential Drawbacks
- If income isn’t high enough, large early deductions may lead to tax losses that might not immediately benefit without carryforward or carryback.
- If recapture is triggered due to change in use, taxable income will jump in later years.
- Careful planning is needed to ensure property truly qualifies under interim definitions.
Entity Setup with this depreciation allowance offers huge upfront tax savings—but only if you carefully meet all requirements. Interim guidance provides a roadmap until final regulations are released.
**Category**: Entity Setup