Entity Setup
Navigating the New Special Depreciation Rules for Qualified Production Property
A little-known change under the One, Big, Beautiful Bill lets businesses take a **100% special depreciation allowance** on qualified production property. Here's how to use it without tripping IRS guidance issues.
By NomadicTax Research Team • 5-8 min read • March 18, 2026
## What is the special depreciation allowance and what changed
The One, Big, Beautiful Bill (OBBBA), enacted July 4, 2025, added section 168(n) to the Internal Revenue Code, giving businesses a **100% special depreciation allowance** for certain **qualified production property** placed in service after that date and before January 1, 2031. ([irs.gov](https://www.irs.gov/pub/irs-drop/n-26-16.pdf?utm_source=openai))
In Notice 2026-16 (issued about 3 weeks ago), Treasury and IRS released **interim guidance** in advance of forthcoming proposed regulations. This guidance addresses definitions, elections, and recapture rules. ([irs.gov](https://www.irs.gov/pub/irs-drop/n-26-16.pdf?utm_source=openai))
## Key definitions & requirements from the interim guidance
- **Qualified Production Property**: It includes property used in the production of tangible goods for sale, like manufacturing machinery, equipment, etc. Guidance defines what property qualifies and when. ([irs.gov](https://www.irs.gov/pub/irs-drop/n-26-16.pdf?utm_source=openai))
- **Election to claim**: Taxpayers must make an election to designate property as Qualified Production Property in their tax return for that tax year. ([irs.gov](https://www.irs.gov/pub/irs-drop/n-26-16.pdf?utm_source=openai))
- **Depreciation recapture**: If property changes use (e.g., ceases production use), recapture rules apply—taxpayer must include in income a portion of prior depreciation deductions. ([irs.gov](https://www.irs.gov/pub/irs-drop/n-26-16.pdf?utm_source=openai))
## Example situations
- **Manufacturing business buys new equipment in 2025**: Suppose a business outputs clothing and purchases sewing machines in May 2025. These machines are used directly in production. The business may elect to treat those as qualified production property and expense 100% of basis immediately, instead of depreciating over several years.
- **Farmer with long-production period property**: Suppose you buy or acquire property with long pre-productive period (like a fruit tree orchard), guidance may limit inclusion depending on whether it's placed in service before Jan-1-2031, and whether election is made. The guidance also clarifies treatment of specified plants bearing fruit or nuts. ([irs.gov](https://www.irs.gov/pub/irs-prior/p225--2025.pdf?utm_source=openai))
## Actionable insights for businesses
- Track acquisition and placed-in-service dates carefully—it triggers what depreciation regime applies.
- Consult your tax software or advisor early: you’ll need to **elect** to apply § 168(n) for each property item. Missed election may mean missing out.
- Evaluate whether full immediate expensing (100%) makes more sense than spreading depreciation—consider cash flow, taxable income, potential recapture risk if use shifts.
- Be mindful of tax limits: property must be used predominantly in the U.S. qualifying trade or business. Also consider “long production period” exceptions.
## Compliance considerations & potential pitfalls
- Interim guidance isn't final regs; there may be tweaks in proposed regulations—be conservative with interpretation until regs are finalized.
- If you change business use (e.g. start leasing production property out), be prepared to recapture depreciation. Maintain documentation of use.
- Election must be timely on the return, including extensions. Late election may not be allowed.
## Strategic recommendations
- For year ending 2025, consider bringing forward purchases into 2025 to take advantage of the allowance under § 168(n).
- Spread investments across years with attention to cash tax savings vs long-term recapture risk.
- Coordinate with state tax rules, since some states may not conform immediately or may follow federal expensing rules differently.
## Bottom line
The new rules for qualified production property under OBBBA offer a powerful tool for **accelerating deductions**, improving cash flow, and lowering taxes – provided you elect properly and comply with the definitions and recapture rules. Watch out for the upcoming final regulations for full clarity.