Full first year expensing on a new plant comes down to how well you can describe the space.

The deduction is generous. The evidence for it is architectural.

Nonresidential real property normally depreciates over thirty nine years. A company that spends sixty million dollars on a plant recovers that cost slowly enough that the finance model treats it as a fact of life. Section 168(n), added by the legislation enacted on 4 July 2025, offers a different outcome for a narrow category of buildings: a hundred percent of the designated basis, deducted in the year the property is placed in service.

On 20 February 2026 the IRS issued Notice 2026-16 as interim guidance, alongside news release IR-2026-25, announcing that proposed regulations are coming and that taxpayers may rely on the notice until they arrive. Those regulations have not been published, so the notice is the operating manual today. It is unusually specific, and the specificity is where this stops being a tax memo.

The qualifying unit is not a building. It is a portion of a building, and the portion is defined by what physically happens inside it. A process hall qualifies. The front office attached to it does not. The bay where raw materials arrive counts, and the bay where finished pallets wait for a truck does not, even when both sit under the same roof and on the same asset record. Getting from a floor plan to a defensible dollar amount is the actual work, and almost none of the data it needs sits in a fixed asset register today.

That is a good problem to have, because it is buildable. Space measurements, use codes, project records and cost segregation studies all exist somewhere in most manufacturing businesses. They are just held in different systems by different teams, and joined by hand once a year if at all. Joining them properly pays for itself here and keeps paying for a decade, because this election comes with a ten year monitoring obligation attached.

What has to be true, and where each answer lives.

Notice 2026-16 restates the statutory conditions as a list a taxpayer can work through. Reading it as a data exercise rather than a legal one is useful, because each condition is answered by a different system and a different team, and the ones most likely to be weak are the ones nobody owns.

Two structural rules sit underneath that list. The unit of property is determined using the existing disposition rules, so each building including its structural components is a single unit, and an improvement or addition placed in service later is a separate unit of its own. Each unit has to satisfy the integral part requirement by itself. There is then a grouping rule for integrated facilities: where multiple properties operate as an integrated facility, evidenced by how they actually operate, and sit on the same or contiguous pieces of land, they may be treated as a single unit of property solely for that test. A property made up entirely of ineligible space cannot join a group that way.

The activity definition is narrower than the everyday meaning of production. A qualified production activity is manufacturing, production or refining of a qualified product that results in a substantial transformation, and production for this purpose means only agricultural or chemical production. A qualified product is tangible personal property, other than food or beverage prepared in the same building as the retail establishment that sells it. Contract manufacturers are covered on this point: the notice says that whether the taxpayer is the tax owner of the resulting product is not taken into account.

The test is a floor plan question, and the answers are already drawn.

Section 4.02 of the notice puts it plainly: property satisfies the integral part requirement if a qualified production activity is conducted in, or takes place within, the physical space of that property, and if only a portion of the space hosts the activity, only that portion satisfies it. That single sentence is what moves this out of the tax department and into the drawing set.

There is real relief in the ninety five percent rule. If at least ninety five percent of a property qualifies when it is placed in service, the taxpayer may elect to treat the whole property as qualifying, by including a declaration to that effect in the election statement. A purpose built plant with a small office may well clear that line. A combined plant and regional office will not, and the difference is worth knowing during design rather than during the filing.

The essential activity rule is what saves several rooms that would otherwise fail on their own. An activity that does not itself transform anything still counts if it happens in the same property or integrated facility, is not in excluded space, and the transformation could not occur without it, or would yield a product of different quality or a different quantity. Oversight of production, material and vendor selection, management of production costs and capacity, and direction of product design are treated as related activities that do not disqualify a space, though a space containing only those activities is not itself a qualified production activity.

Splitting the basis, with a named list of methods that work.

Where a property is mixed, the taxpayer allocates the unadjusted depreciable basis between eligible and ineligible portions. The notice permits any reasonable method and then does something helpful: it names candidates. Square footage, cost segregation data, architectural or engineering plans, process diagrams and construction invoices may each be reasonable. Its worked example is arithmetic anyone can follow, where half the square footage is eligible and half the basis follows it.

It also names what does not work, and this is the sentence to circulate internally before somebody builds a model. Using employee headcount, or employee time spent on qualifying activities, is not a reasonable method of allocating basis to eligible property. Those are the two drivers most readily available in a finance system and the two that a controller would reach for first, and they are both off the table. Space is the currency here.

Shared building systems get their own paragraph. Where infrastructure serves both sides, with a central air conditioning system and a sprinkler system given as examples, the basis may be allocated by any reasonable method that takes account of the actual or planned usage of that infrastructure, using plans, blueprints, process diagrams, product specifications or a combination. A taxpayer may use more than one method for a single property where one method alone would not allocate properly, provided each is applied consistently and reflects the facts of the property.

The last piece of the calculation is a choice rather than a computation. A taxpayer designates either the entire unadjusted depreciable basis of the eligible property or a specific dollar amount up to that figure. Saying nothing about the amount designates all of it. Designating less is a legitimate planning lever where loss position, state conformity or the shape of later years matters, which means the register needs to hold the eligible basis and the designated amount as two separate numbers.

The artefact: one asset record that can answer the whole question.

The election statement itself reads like a report specification. It is titled STATEMENT PURSUANT TO SECTION 7 OF NOTICE 2026-16, and for each property it needs the street address, city, state and zip code, a description of the property, the total unadjusted depreciable basis, the basis allocable to the eligible portion with a description identifying it, and the dollar amount being designated. Every one of those is a field. The question is whether they live together anywhere.

{
  "asset": {
    "asset_no": "FA-2027-0114",
    "description": "Plant 3 primary manufacturing building",
    "unit_of_property": "building_incl_structural_components",
    "street_address": "1400 Placeholder Industrial Parkway",
    "city": "Placeholder City",
    "state": "OH",
    "zip": "43000",
    "placed_in_service": "2027-03-19",
    "unadjusted_depreciable_basis_usd": 62400000,
    "macrs_class": "nonresidential_real_property",
    "ads_applies": false
  },
  "capital_project": {
    "project_id": "CAP-2025-0088",
    "construction_begin_determination": "2025-06-04",
    "begin_construction_basis": "physical_work_of_significant_nature",
    "evidence_ref": "DOC-2025-0088-BOC",
    "original_use_with_taxpayer": true
  },
  "space_use": {
    "measured_from": "architectural_plans_rev_F",
    "total_sq_ft": 412000,
    "zones": [
      { "zone": "Z-01 process hall",        "sq_ft": 268000, "use": "qpa_transformation",   "eligible": true },
      { "zone": "Z-02 raw material intake", "sq_ft": 54000,  "use": "raw_material_storage", "eligible": true },
      { "zone": "Z-03 finished goods",      "sq_ft": 46000,  "use": "finished_goods",       "eligible": false },
      { "zone": "Z-04 front office",        "sq_ft": 28000,  "use": "office_admin",         "eligible": false },
      { "zone": "Z-05 process engineering", "sq_ft": 16000,  "use": "engineering",          "eligible": false }
    ],
    "eligible_sq_ft": 322000,
    "eligible_share": 0.7816,
    "de_minimis_95_available": false
  },
  "allocation": {
    "primary_method": "square_footage",
    "secondary_method": "engineering_plans_for_dual_use_infrastructure",
    "dual_use_items": ["central_hvac", "sprinkler_system", "primary_electrical"],
    "eligible_basis_usd": 48771840,
    "prepared_by": "fixed asset accounting",
    "reviewed_by": "corporate tax",
    "evidence_refs": ["PLAN-REV-F", "COSTSEG-2027-011", "PROCESS-DIAG-P3"]
  },
  "election": {
    "designated_qpp_usd": 48771840,
    "designation_type": "entire_eligible_basis",
    "de_minimis_rule_applied": false,
    "statement_filed_with": "FY2027 federal income tax return",
    "filed_on": "2028-09-12",
    "revocable": "private letter ruling only"
  },
  "monitoring": {
    "change_in_use_window_ends": "2037-03-19",
    "review_frequency": "annual",
    "owner": "corporate tax",
    "last_reviewed": "2028-12-31",
    "status": "integral part requirement met"
  }
}

Three things in that shape are worth calling out. The zones carry areas and use codes rather than a single eligible percentage, so the share can be recomputed and explained later, and so a change in use can be recorded against a specific space. The allocation block records the method and the documents behind it, because the notice describes methods in terms of the evidence they rest on. And the monitoring block exists at all, with an owner and an end date, because the obligation created by the election outlives the return by ten years.

The record above is a worked example of the shape being described. It is not an extract from any customer system, and the entity, address and figures in it are placeholders.

An implementation checklist for the next two quarters.

There is a live deadline in this for anyone who placed eligible property in service in 2025. The election is made by the due date of the original return for the placed in service year, including extensions, and Form 7004 gives an automatic six month extension. A calendar year filer that extended its 2025 return is filing this autumn. For property placed in service after 4 July 2025 and on or before 31 December 2025, the notice also offers a safe harbor based on the principal business activity code on the most recently filed return, where that code falls in NAICS sectors 31, 32 or 33 or subsectors 111 or 112, and the activity still results in or is essential to a substantial transformation.

• Give every production property a space level use classification before the year it is placed in service. The test in the notice is whether the qualified production activity is conducted within the physical space, so the underlying record is a zone with a use code and an area, not a cost centre with a budget.
• Decide the unit of property first, because everything else sits inside it. Each building including its structural components is a single unit, and an improvement or addition placed in service later is its own separate unit. A campus built in phases will produce several elections rather than one.
• Check whether the integrated facility rule applies before you write anything off as failing. Multiple properties that operate as an integrated facility, evidenced by how they actually operate, and located on the same or contiguous land, may be treated as one unit of property for the integral part test. A standalone raw material store that cannot qualify alone may qualify inside the facility.
• Capture the beginning of construction determination at the time construction begins. The notice applies rules consistent with the section 168(k) regulations, including the safe harbor. Whichever route you take, it is a contemporaneous conclusion supported by contemporaneous documents, and it is far cheaper to file than to rebuild.
• Run the ninety five percent test deliberately rather than hopefully. If ninety five percent or more of the physical space meets the integral part requirement when the property is placed in service, you may elect to treat the whole property as meeting it, and you say so in the election statement. Below that line, you allocate.
• Pick the allocation method from the list the notice actually gives. Square footage, cost segregation data, architectural or engineering plans, process diagrams and construction invoices may all be reasonable. Employee headcount and employee time spent on qualifying activities are named as not reasonable, which rules out the allocation basis many finance teams reach for first.
• Handle dual use infrastructure separately and say how. Central air conditioning and sprinkler systems serve both sides of the line, and the notice allows a reasonable allocation that takes account of actual or planned usage. More than one method may be used on a single property where one alone would not allocate the basis properly.
• Model the designation as a lever rather than a checkbox. You may designate the entire eligible basis or a specific dollar amount up to it. That choice interacts with loss position, state conformity and the depreciation profile of later years, so the register needs to hold a partial designation without losing the eligible basis it came from.
• Diary the election with the return, including extensions. The election is made by the due date, including extensions, of the original federal income tax return for the year the eligible property is placed in service. For a calendar year filer that extended a 2025 return under the automatic six month extension, that window closes this autumn.
• Set up the ten year change in use monitor on the day the property is placed in service. A change in use inside ten calendar years pulls the deduction back through section 1245 as ordinary income. Moving from one qualifying activity to another does not trigger it, and property that is temporarily idle for a finite period does not either, so the monitor needs to record why space changed, not only that it did.

For everyone else the timetable is longer and the work is the same. Construction has to begin before 1 January 2029 and the property has to be in service before 1 January 2031, so the projects that will use this are being scoped now. A capital project that records its beginning of construction determination, keeps its drawings versioned, and tags its zones by use as they are designed will hand the tax team a finished answer. A project that does none of those will hand it a measuring exercise several years after the builders left.

Failure modes, and what each one looks like from inside.

• Treating the whole building as one answer. The statute qualifies a portion of nonresidential real property, and each unit of property has to satisfy the integral part requirement on its own before any grouping rule helps. A plant with a large front office is a split, and the split has to be measured.
• Allocating by people. Headcount and employee time are the two bases the notice specifically names as not reasonable. A shop floor can be far larger than a busy office and hold far fewer people, and the deduction follows the space.
• Assuming warehouse space is warehouse space. Receiving and storing raw materials to be used in the activity is essential to it. Storing finished products is not. One building can hold both, and the register needs the boundary between them before somebody has to certify a number.
• Filing late and hoping. The election has to be on a timely filed original return for the placed in service year, and revocation requires a private letter ruling and the written consent of the Secretary, given only in extraordinary circumstances. The notice adds that a request that would let a taxpayer use hindsight does not meet that standard.
• Forgetting that the election takes the property out of bonus depreciation. Qualified production property is treated as a separate class, and electing it is treated as electing out of the section 168(k), (l) and (m) allowances for that class. That is a deliberate trade rather than a stacking opportunity, and it belongs in the model before the election is made.
• Leaving the lessor question until the lease is signed. Property used by a lessee is not treated as used by the taxpayer for this test, with carve outs for an intercompany lease inside a consolidated group and for leases to commonly controlled persons. A group that owns plant in a property company and operates it in a trading company should check which carve out it is relying on.
• Letting the ten year window fall off the calendar. Recapture applies to a change in use at any time in the ten calendar years starting when the property is placed in service, and only to the portion that changed. That is a control with a decade long life, which means it needs an owner and a review rhythm rather than a note in a workpaper.
• Reading the 2025 safe harbor as a general shortcut. The NAICS based safe harbor covers property placed in service after 4 July 2025 and on or before 31 December 2025, and it still requires the activity to result in, or be essential to, a substantial transformation. It simplifies one year, and it is silent about every year after.

Data and interface considerations.

• The missing object in most finance architectures is a space register. Facilities and real estate systems usually hold areas and room use. Fixed asset systems hold cost, class and life. The number this election needs comes from joining them, and the join is easier to build once than to improvise at each filing.
• A use code per zone is more durable than a percentage. Storing a single eligible share on the asset gives you the answer for one year and no way to explain it later. Storing zones, areas and use codes lets the share be recomputed, reviewed and defended, and lets a change in use be recorded against a specific space.
• The capital project record and the asset record need a real link. Beginning of construction, original use and the invoices behind an allocation all sit on the project side. The election and the basis sit on the asset side. Where that link is a spreadsheet, the evidence chain is a spreadsheet.
• Partial designation needs first class support. Designating a specific dollar amount below the eligible basis is a normal planning move, so the data model should carry eligible basis and designated amount as separate fields rather than overwriting one with the other.
• Tax book divergence is now specific and predictable. Electing qualified production property means electing out of bonus depreciation for that class, so the tax book takes the whole amount in year one and the book depreciation runs on unchanged. Modelling that as a defined difference per asset is far cleaner than a period level true up.
• The election statement is a structured document waiting to be generated. It needs the taxpayer name and identification number, and for each property a street address, city, state, zip code and description, the total unadjusted depreciable basis, the eligible basis and a description that identifies it, and the designated amount. Every one of those is a field, so the statement can be produced from the register rather than typed.
• Change in use is an event, not an attribute. The monitoring window runs ten calendar years from the placed in service date and applies to the portion that changed. That is an event log against a space, with an effective date and a reason, which is also exactly what an auditor will ask to see.

The reliance condition deserves a line of its own in any design. A taxpayer relying on the interim guidance for property placed in service before the proposed regulations are published has to follow sections 3 through 8 of the notice in their entirety, for all qualified production property placed in service in those years, starting with the first year of reliance. That is a policy decision made once at group level, and the systems that compute these allocations should carry which basis they were prepared under, so the answer can be reproduced when the regulations land.

Audit evidence worth capturing from the first election.

• The space measurement behind the allocation, with the plan revision it was taken from and the date it was measured. Square footage is the simplest reasonable method in the notice, and it is only as good as the drawing it came from.
• The use classification for each zone, with the person who assigned it and the basis for the call. The interesting entries are the ones near the line: a receiving dock, a quality laboratory, a maintenance shop, a mixed storage bay.
• The dual use infrastructure allocation, showing that it took account of actual or planned usage. The notice allows plans, blueprints, process diagrams, product specifications or a combination, and the file should say which was used and why.
• The beginning of construction determination, dated, with the supporting documents. This is a condition that can be satisfied years before the deduction is claimed, and it is the one most likely to be evidenced weakly.
• The election statement as filed, held against the asset record it describes. Since revocation runs through a private letter ruling, the filed version is the version, and it should be retrievable from the asset rather than from the tax file alone.
• The reliance position taken on the notice. A taxpayer relying on sections 3 through 8 has to follow them in their entirety for all qualified production property placed in service in those years, beginning with the first year of reliance. That is a group wide consistency statement, and it should be written down once rather than assumed per property.
• The annual change in use review for each elected property, including the years when nothing changed. A ten year control that only produces evidence in the year something goes wrong is not a control.