The One Big Beautiful Bill Act (OBBBA) created a new depreciation incentive designed to encourage businesses to build and expand production facilities in the United States. Under Internal Revenue Code Section 168(n), eligible taxpayers may be able to claim a 100% special depreciation allowance for certain qualified production property. This allows businesses to recover the cost of qualifying property much faster than under normal depreciation rules.
While most individual taxpayers won't qualify, business owners who operate manufacturing, agricultural production, refining, or chemical production facilities should understand how this provision works.
What Is Section 168(n)?
Section 168(n) allows taxpayers to elect a special depreciation deduction of up to 100% of the unadjusted depreciable basis of qualified production property. The provision was enacted as part of the OBBBA to encourage investment in domestic production facilities and industrial expansion.
Unlike traditional bonus depreciation, which generally applies to equipment and certain other depreciable assets, Section 168(n) focuses on specific types of nonresidential real property used in qualifying production activities.
What Is Qualified Production Property?
Qualified production property is generally nonresidential real property that is used by a taxpayer as an integral part of a qualified production activity.
Examples may include:
- Manufacturing facilities
- Processing plants
- Production buildings
- Certain refining facilities
- Agricultural production facilities
The property must satisfy all applicable statutory requirements to qualify for the special depreciation allowance. Not every building used in a business activity will qualify.
What Is a Qualified Production Activity?
According to IRS guidance, a qualified production activity generally includes:
- Manufacturing activities
- Chemical production activities
- Agricultural production activities
- Refining activities
The activity must result in the substantial transformation of property into a qualified product. Simply storing, distributing, or selling products generally does not qualify as a production activity.
How Much Can You Deduct?
If all requirements are met and a taxpayer makes the election, Section 168(n) may allow a depreciation deduction equal to 100% of the property's eligible depreciable basis in the year the property is placed in service.
Example
Suppose a business constructs a qualifying production facility costing $5 million.
Under normal depreciation rules, the building's cost would typically be recovered over many years. If the property qualifies under Section 168(n), the taxpayer may be able to deduct the entire eligible depreciable basis in the year the facility is placed in service.
That accelerated deduction can significantly reduce taxable income and improve cash flow during periods of business expansion.
When Does Section 168(n) Apply?
The special depreciation allowance is available only for qualified production property that is:
- Placed in service after July 4, 2025, and
- Placed in service before January 1, 2031.
Property placed in service outside this window generally won't qualify for the Section 168(n) deduction.
Can Individual Taxpayers Claim This Deduction?
Yes, but only if they own a business that places qualified production property in service.
Potential claimants may include:
- Sole proprietors
- Farmers
- Owners of manufacturing businesses
- Partners in partnerships
- Shareholders of S corporations
Most wage earners and taxpayers with only investment income won't encounter Section 168(n) when preparing their individual tax returns.
What Happens if the Property Stops Qualifying?
Section 168(n) includes depreciation recapture rules. If property that received the special depreciation allowance later ceases to meet the requirements for qualified production property, part or all of the deduction may be subject to recapture. The IRS has issued interim guidance addressing these rules.
Because recapture can create additional taxable income, taxpayers should keep records demonstrating continued qualified use of the property.
How Is the Deduction Reported?
The deduction is generally reported through the taxpayer's depreciation schedules and may require additional elections and supporting documentation. The IRS issued interim guidance in Notice 2026-16 explaining how taxpayers determine eligibility, calculate the deduction, and make the required election.
Taxpayers should maintain records showing:
- Construction costs
- Date placed in service
- Use of the property
- Business activity conducted at the facility
- Documentation supporting qualification under Section 168(n)
Section 168(n) vs. Bonus Depreciation
Although both provisions accelerate depreciation deductions, they apply to different types of property.
| Feature | Section 168(n) | Bonus Depreciation Under Section 168(k) |
|---|---|---|
| Focuses on production facilities | Yes | No |
| Applies to many types of equipment | No | Yes |
| Requires a qualified production activity | Yes | No |
| Can provide a 100% first-year deduction | Yes | Yes |
| Created by the OBBBA | Yes | Expanded by the OBBBA |
Businesses often need to analyze both provisions because different assets within the same project may qualify under different depreciation rules.
Key Takeaways
Section 168(n) is a new tax incentive created by the One Big Beautiful Bill Act that allows eligible taxpayers to claim a 100% special depreciation allowance for qualified production property used in certain domestic production activities. The provision is intended to encourage investment in U.S. manufacturing, refining, agricultural production, and chemical production facilities.
For taxpayers building or expanding production facilities between July 4, 2025, and December 31, 2030, Section 168(n) may provide a substantial first-year tax deduction and significantly accelerate cost recovery. Because the qualification and recapture rules are complex, taxpayers should carefully review the IRS guidance and maintain detailed records supporting the property's qualifying use.