SECTION 2. BACKGROUND — Internal Revenue Bulletin 2026-11

.01 In general . Section 167(a) allows as a deduction a reasonable allowance for

the exhaustion, wear and tear, and obsolescence of property used in a trade or business or of property held for the production of income (depreciation deduction). The depreciation deduction allowable for tangible depreciable property placed in service after 1986 generally is determined under the Modified Accelerated Cost Recovery System (MACRS) provided by § 168.

Section 70307 of the OBBBA amended § 168 to add § 168(n) to provide a temporary special depreciation allowance for qualified production property placed in service after July 4, 2025. Section 168(n) (1)(A) provides that, for any qualified production property for which an election is made, the depreciation deduction provided by § 167(a) for the taxable year such property is placed in service includes an allowance equal to 100 percent of the adjusted basis of the qualified production property. Section 168(n)(1)(B) provides that the adjusted basis of the qualified production property is reduced by the amount of the deduction under § 168(n)(1)(A) before computing the amount otherwise allowable as a depreciation deduction for such taxable year and any subsequent taxable year.

.02 Definition of qualified production property .

(1) In general . Section 168(n)(2)(A) defines the term qualified production property as that portion of any nonresidential real property:

(a) to which § 168 applies, (b) that is used by the taxpayer as an integral part of a qualified production activity (as defined in § 168(n)(2)(D)),

(d) the original use of which commences with the taxpayer,

(e) the construction of which begins after January 19, 2025, and before January 1, 2029,

(f) that is designated by the taxpayer in an election under § 168(n), and

(g) that is placed in service after July 4, 2025, and before January 1, 2031. (2) Leased property . Under § 168(n)(2) (A), for purposes of determining whether property is used by the taxpayer as an inte

gral part of a qualified production activity, in the case of property with respect to which the taxpayer is a lessor, property used by a lessee is not considered to be used by the taxpayer as part of a qualified production activity.

(3) Special rule for certain property not previously used in qualified produc- tion activities .

(a) In general . Section 168(n)(2) (B) provides special rules for determining whether certain used property may be qualified production property. Under § 168(n)(2)(B)(i), a taxpayer that acquires used property after January 19, 2025, and before January 1, 2029, is treated as the original user of the property and the construction of the property is treated as having begun after January 19, 2025, and before January 1, 2029, if:

(i) the property was not used in a qualified production activity (determined without regard to whether such activity resulted in a substantial transformation of the property comprising the qualified product) by any person at any time during the period beginning on January 1, 2021, and ending on May 12, 2025,

(ii) the property was not used by the taxpayer at any time prior to such acquisition, and

(iii) the acquisition of the property meets the requirements of § 179(d)(2) and (3) (that is, the property is not acquired from a related party or by a member of a controlled group from another member of the same group, and the taxpayer’s basis in the property is not determined by reference to its basis in the hands of the transferor).

(b) When property is acquired . Section 168(n)(2)(B)(ii)(I) provides that, for purposes of determining whether used property is acquired before the period that begins after January 19, 2025, and ends before January 1, 2029, the property is treated as acquired not later than the date on which the taxpayer enters into a written binding contract for such acquisition. Section 168(n)(2)(B)(ii)(II) provides that used property is treated as acquired not earlier than such date for purposes of determining whether it is acquired after such period.

1 Unless otherwise specified, all “section” or “§” references are to sections of the Code or the Income Tax Regulations (26 CFR part 1).

Bulletin No. 2026–11 685 March 9, 2026

(4) Exclusion of office space, etc . Section 168(n)(2)(C) provides that qualified production property does not include any portion of nonresidential real property that is used for offices, administrative services, lodging, parking, sales activities, research activities, software development or engineering activities, or other functions unrelated to the manufacturing, production, or refining of tangible personal property.

(5) Definition of qualified production activity . Section 168(n)(2)(D) defines qualified production activity as the manufacturing, production, or refining of a qualified product that results in a substantial transformation of the property comprising the qualified product.

(6) Definition of production . Section 168(n)(2)(E) provides that production does not include activities other than agricultural and chemical production.

(7) Definition of qualified product . Section 168(n)(2)(F) defines a qualified product as any tangible personal property, other than a food or beverage prepared in the same building as a retail establishment in which it is sold.

(8) Other rules . (a) Syndication . Section 168(n)(2)(G) provides that, for purposes of § 168(n) (2)(A)(iv), which requires that property must be originally used by a taxpayer to be qualified production property in that taxpayer’s hands, rules similar to § 168(k) (2)(E)(iii) apply.

(b) Extension of time for satisfying placed-in-service-date requirement under certain circumstances . Under § 168(n)(2) (H), in the case of a taxpayer prevented from placing in service property that would otherwise be qualified production property before January 1, 2031, the Secretary of the Treasury Department or the Secretary’s delegate (Secretary) may extend the time for satisfying the placedin-service-date requirement if the Secretary determines that such taxpayer was prevented from placing the property in service before January 1, 2031, due to an act of God (as defined in the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, § 101(1), 42 U.S.C. 9601). (c) Alternative minimum tax . Section 168(n)(3) provides that, in determining alternative minimum taxable income under § 55, the deduction under § 167

for qualified production property is determined under § 168 without regard to any adjustment under § 56.

.03 Coordination with certain other provisions .

(1) Other special depreciation allow- ances . Section 168(n)(4)(A) provides that, for purposes of § 168(k)(7) (election out of the special depreciation allowance for qualified property), § 168(l)(3)(D) (election out of the special depreciation allowance for qualified second generation biofuel plant property), and § 168(m)(2) (B)(iii) (election out of the special depreciation allowance for qualified reuse and recycling property), qualified production property is treated as a separate class of property, and the taxpayer is treated as having made an election under such subsections with respect to such class if the taxpayer elects to treat the property as qualified production property under § 168(n).

(2) Alternative depreciation prop- erty . Section 168(n)(4)(B) provides that qualified production property does not include any property to which the alternative depreciation system (ADS) under § 168(g) applies. For purposes of the election to use ADS under § 168(g)(7)(A), qualified production property is treated as separate nonresidential real property.

.04 Recapture . Section 168(n)(5)(A) provides that if, at any time during the 10-year period beginning on the date that qualified production property is placed in service by the taxpayer, the property ceases to be used as an integral part of a qualified production activity and is used in another productive use, § 1245 is applied by (1) treating the property as having been disposed of when first used in a productive use that is not a qualified production activity, and (2) treating as ordinary income the excess of the property’s recomputed basis, as defined in § 1245(a)(2), over its adjusted basis. In addition, § 168(n)(5)(B) provides that the taxpayer’s basis in the property and allowance for depreciation with respect to such property is appropriately adjusted to take into account the ordinary income recognized by reason of § 168(n)(5)(A).

.05 Election to apply § 168(n) . Section 168(n)(6)(A) provides that an election under § 168(n)(6) for any taxable year (1) must specify the nonresidential real prop

erty subject to the election and the portion of such property designated as qualified production property under § 168(n)(2)(A) (vi), and (2) except as otherwise provided by the Secretary, is made on the taxpayer’s Federal income tax return for the taxable year. Further, such election is made in such manner as the Secretary may prescribe by regulations or other guidance. Section 168(n)(6)(B) provides that any election made under § 168(n)(6), and any specification contained in any such election, may not be revoked except with the consent of the Secretary (and the Secretary may provide such consent only in extraordinary circumstances).

.06 Authority to prescribe regulations and other guidance . Section 168(n)(7) directs the Secretary to issue regulations or other guidance as may be necessary or appropriate to carry out the purposes of § 168(n), including regulations or other guidance providing rules (1) for what constitutes substantial transformation of property that are consistent with guidance provided under § 954(d), and (2) for the application of the depreciation recapture rule in § 168(n)(5) with respect to a change in use by a transferee following a fully or partially tax-free transfer of qualified production property.