SECTION 4. QUALIFIED

PRODUCTION PROPERTY

.01 In general . Except as otherwise provided in section 4.06 of this notice, the term qualified production property (QPP) means property, or a portion thereof, that is nonresidential real property and—

(1) That is MACRS property; (2) That is used by the taxpayer, or will be used by the taxpayer once placed in service, as an integral part of a qualified production activity (QPA), as defined in section 5 of this notice (integral part requirement);

(3) That is placed in service in the United States or any territory of the United States;

(4) The original use of which commences with the taxpayer (original use requirement);

(5) The construction of which begins after January 19, 2025, and before January 1, 2029, as determined under section 4.05 of this notice (beginning of construction requirement);

(6) That the taxpayer designates as QPP under section 4.09 of this notice in an election made in the time and manner provided in section 7 of this notice;

(7) That is placed in service after July 4, 2025, and before January 1, 2031 (placedin-service-date requirement);

(8) That is not property to which the alternative depreciation system (ADS) under § 168(g) applies; and

(9) That is not ineligible property described in section 4.07 of this notice.

.02 Integral part requirement . (1) In general . Property, or a portion thereof, is used as an integral part of a QPA and satisfies the integral part requirement if a QPA is conducted in, or takes place within, the physical space of such property or within a portion of the physical space thereof. If a QPA is conducted in, or takes place within, only a portion of the physical space of a property, only such portion satisfies the integral part requirement. Each unit of property, as determined under section 4.03(1) of this notice, must satisfy the integral part requirement on its own; however, see section 4.03(2) for a special rule for integrated facilities.

(2) De minimis rule . If 95 percent or more of the physical space of a property satisfies the integral part requirement at the time the property is placed in service, the taxpayer may elect to treat the entire property as satisfying the integral part requirement. Such election is made by including a declaration in the taxpayer’s election statement under section 7 of this notice.

(3) Property used by a lessee . (a) In general . Except as provided in section 4.02(3)(b) and (c) of this notice, in the case of property with respect to which the taxpayer is a lessor, property used by a lessee engaged in a QPA is not treated as used by the taxpayer as an integral part of a QPA and the taxpayer does not satisfy the integral part requirement. See § 168(n) (2)(A).

(b) Exception for consolidated groups . If a member (S) of a consolidated group (each as defined in § 1.1502-1) owns and leases property to another member (B) of the group (intercompany lease), then for purposes of section 4.02(3)(a) of this notice, S is not treated as a lessor with respect to the property, and for purposes of section 4.02(1) of this notice, the consolidated group is treated as a single taxpayer. Accordingly, S determines whether the leased property subject to the intercompany lease with B satisfies the integral part requirement by reference to the trade or business activities of B conducted in, or taking place within, the leased property.

(c) Exception for commonly controlled pass-through entities . If a partnership or an S corporation, referred to as a lessor

pass-through entity in this notice, or an individual leases property to a commonly controlled person, then for purposes of section 4.02(3)(a) of this notice, the lessor pass-through entity or lessor individual is not treated as a lessor with respect to the property, and for purposes of section 4.02(1) of this notice, the lessor passthrough entity or lessor individual determines whether the property meets the integral part requirement by reference to the commonly controlled person’s trade or business activities conducted in, or taking place within, the leased property. The term commonly controlled person means either:

(i) a sole proprietorship, partnership, or corporation of which 50 percent or more is owned, directly or by attribution under § 267(b) or § 707(b), by the same person or group of persons that own, directly or by attribution under § 267(b) or § 707(b), 50 percent or more of the lessor passthrough entity for a majority of the taxable year in which the property is placed in service, including on the last day of such year, or

(ii) a sole proprietorship, partnership, or corporation of which 50 percent or more is owned, directly or by attribution under § 267(b) or § 707(b), by the lessor individual or the lessor pass-through entity for a majority of the taxable year in which the property is placed in service, including on the last day of such year.

.03 Unit-of-property determination . (1) In general . Except as provided in section 4.03(2) of this notice, the term unit of property means the asset as determined using the rules under § 1.168(i)-8(c)(4). Accordingly:

(a) Each building, including its structural components, is a single unit of property; and

(b) If the taxpayer places in service an improvement or addition to an asset after the taxpayer placed the asset in service, the improvement or addition, including any of its structural components, is a separate unit of property.

(2) Special rule for integrated facil- ities . Solely for purposes of satisfying the integral part requirement, in the case of multiple properties that operate as an integrated facility (as evidenced by their actual operation) and that are physically located or co-located on the same piece or contiguous pieces of land, all properties

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comprising the integrated facility may be treated as a single unit of property. A property that is comprised solely of ineligible property (as described in section 4.07 of this notice) may not be treated as operating as an integrated facility with other properties and may not be treated as a single unit of property with other properties that comprise an integrated facility.

.04 Original use commences with the taxpayer . For purposes of determining whether property satisfies the original use requirement, a taxpayer applies rules consistent with § 1.168(k)-2(b)(3)(ii)(A) through (C).

.05 Determination of when con- struction begins . For purposes of determining whether property satisfies the beginning of construction requirement, a taxpayer applies rules consistent with § 1.168(k)-2(b)(5)(iv)(B), including the safe harbor provided in § 1.168(k)-2(b)(5) (iv)(B)( 2 ).

.06 Special rule for certain property not previously used in a QPA .

(1) In general . In the case of used property acquired by a taxpayer after January 19, 2025, and before January 1, 2029, the original use requirement and beginning of construction requirement are treated as met if the following requirements are satisfied:

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

(b) Such property was not used by the taxpayer at any time prior to such acquisition;

(c) The acquisition of such property meets the requirements of § 179(d)(2)(A), (B), and (C), and § 1.179–4(c)(1)(ii), (iii), and (iv); or § 1.179–4(c)(2) (property is acquired by purchase); and

(d) The acquisition of such property meets the requirements of § 179(d)(3) and § 1.179–4(d) (cost of property).

(2) Property was not used by the tax- payer at any time prior to acquisition . For purposes of determining whether used property meets the requirement in section 4.06(1)(b) of this notice, a taxpayer applies rules consistent with the used property acquisition requirements in

§§ 1.168(k)-2(b)(3)(iii)(B), 1.168(k)-2(b) (3)(iv)(D)(1)(i), and 1.1502-68(b).

(3) Section 179 requirements . For purposes of determining whether used property meets the requirements in section 4.06(1)(c) and (d) of this notice, a taxpayer applies rules consistent with the special rules in §§ 1.168(k)-2(b)(3) (iii)(C), 1.168(k)-2(b)(3)(iv)(D)(1)(ii), 1.168(k)-2(b)(3)(iv)(D)(2), and 1.150268(c). (4) Determining used property acqui- sition date . For purposes of determining whether used property is acquired after January 19, 2025, and before January 1, 2029, a taxpayer applies rules consistent with § 1.168(k)-2(b)(5).

.07 Ineligible property . (1) In general . Ineligible property includes any portion of property used for offices, administrative services, lodging, parking, sales activities, research activities, software development or engineering activities, or other functions unrelated to a QPA. See § 168(n)(2)(C) and (4)(B). Additionally, any portion of property used to store finished products and certain other items is not used as an integral part of a QPA and is thus ineligible property ( see section 5.01(2)(b)(ii) of this notice).

(2) Property used for other ineligi- ble activities. Ineligible property also includes any property, or a portion thereof, that contains a manufacturing, production, or refining activity, or any other activity, that is not within the scope of section 5.01 of this notice. For example, a property that exclusively contains activities described in section 5.01(3) of this notice is ineligible property.

.08 Allocation of basis to eligible prop- erty .

(1) In general . A taxpayer may use any reasonable method to allocate a property’s unadjusted depreciable basis between eligible property and ineligible property. For this purpose, the use of square footage, cost segregation data, architectural or engineering plans, process diagrams, or construction invoices to allocate unadjusted depreciable basis to eligible property may be a reasonable method. For example, assume that a taxpayer constructs property and 50 percent of the square footage of the property is eligible property. The taxpayer may determine the unadjusted depreciable basis of the eligible property

by multiplying the unadjusted depreciable basis of the property by 50 percent. A taxpayer may use more than one reasonable allocation method for a property if using a single allocation method would not properly allocate unadjusted depreciable basis between eligible and ineligible property. Each allocation method must be applied consistently and reflect the property’s facts and circumstances. Using employee headcount or employee time spent on QPA activities is not a reasonable method to allocate unadjusted depreciable basis to eligible property.

(2) Dual-use infrastructure . In the case of property or a portion thereof which contains infrastructure that serves both eligible property and ineligible property (such as a central air conditioning system or a sprinkler system), a taxpayer may allocate the basis of such property between eligible property and ineligible property using any reasonable method. For this purpose, the use of architectural or engineering plans, blueprints, process diagrams, product specifications, or a combination thereof, to allocate unadjusted depreciable basis to eligible property may be a reasonable method if the resulting allocation takes into account the actual or planned usage of the dual-use infrastructure. A taxpayer may also use the same allocation method from section 4.08(1) of this notice if such allocation takes into account the actual or planned usage of the dual-use infrastructure.

.09 Designating the amount of QPP . A taxpayer designates the dollar amount of eligible property that the taxpayer intends to treat as QPP on a property-by-property basis. A taxpayer designates the dollar amount of eligible property by either designating the entire unadjusted depreciable basis of eligible property as QPP or designating a specific dollar amount (not to exceed the unadjusted depreciable basis of the eligible property) as QPP. The amount of the unadjusted depreciable basis of eligible property designated as QPP must be included in the taxpayer’s election statement under section 7 of this notice. An election statement made under section 7 of this notice that does not designate a specific dollar amount of the eligible property’s unadjusted depreciable basis as QPP will be treated as designating the entire unadjusted depreciable basis of eligible property as QPP.

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.10 Elections out of other special depreciation allowances . For purposes of the elections out of § 168(k), (l), and (m) under § 168(k)(7), (l)(3)(D), and (m)(2) (B)(iii), respectively, QPP is treated as a separate class of property and a taxpayer is treated as having made the applicable election(s) out of §§ 168(k), (l), and (m) with respect to any QPP as part of making the election under section 7 of this notice to designate all or a portion of eligible property as QPP. See § 168(n)(4)(A).

.11 Automatic extension of placed-in- service-date requirement under certain circumstances . An automatic one-year extension of the placed-in-service-date requirement is granted for any property that is located in a disaster area (as defined in § 165(i)(5)(B)) at any time during 2030 (affected property). Accordingly, for affected property, the requirement to place property in service before January 1, 2031, is automatically extended to January 1, 2032. If a taxpayer applies the automatic extension of the placed-in-servicedate requirement provided in this section 4.11, the taxpayer must include a declaration to that effect on the election statement required under section 7 of this notice.

.12 Examples . The following examples illustrate the rules set forth in this notice:

(1) Example 1 . (a) Facts . In 2026, Company A, a calendar-year taxpayer, begins construction on a 200,000-squarefoot building (Factory A) located in the United States that Company A will use in its trade or business to conduct a manufacturing activity that is a QPA (as defined in section 5 of this notice). By applying rules consistent with § 1.168(k)-2(b)(5)(iv)(B), Company A determines that construction of Factory A began in February 2026. Construction of Factory A was completed in November 2027, and Factory A was placed in service in December 2027. Upon completion, Factory A has an unadjusted depreciable basis of $60,000,000. No activities are conducted in, or take place within, Factory A except for Company A’s manufacturing activity and Factory A does not contain any space that is ineligible property under section 4.07 of this notice. Factory A is not subject to the alternative depreciation system under § 168(g). On Company A’s timely filed original Federal income tax return for its taxable year ending December 31, 2027, Company A designates $50,000,000 of Factory A’s $60,000,000 unadjusted depreciable basis as QPP in an election statement that is consistent with the requirements in section 7 of this notice.

(b) Analysis . Factory A’s entire unadjusted depreciable basis of $60,000,000 is allocable to eligible property because (i) Factory A is nonresidential real property, (ii) Factory A is MACRS property, (iii) all of Factory A is used as an integral part of a QPA, (iv) Factory A’s original use commenced with Company

A, (v) Factory A’s construction began after January 19, 2025, and before January 1, 2029, (vi) Factory A is placed in service after July 4, 2025, and before January 1, 2031, (vii) Factory A is not ADS property, and (viii) Factory A is not ineligible property. Accordingly, Company A has QPP of $50,000,000, equal to the amount of eligible property designated as QPP by Company A on the election statement filed with its timely filed original Federal income tax return.

(2) Example 2 . (a) Facts . The facts are the same as in Example 1, except that Factory A contains 6,000 square feet of office space and 4,000 square feet of other space not used as an integral part of a QPA, and Company A makes an election to use the de minimis rule described in section 4.02(2) of this notice.

(b) Analysis . Out of Factory A’s total square footage of 200,000 square feet, only 190,000 square feet satisfies the integral part requirement as Factory A also contains 6,000 square feet of office space and 4,000 square feet of other space that is not used as an integral part of a QPA. As the square footage that satisfies the integral part requirement is 95% (190,000 square feet / 200,000 square feet) of Factory A’s total square footage, and Company A made an election to use the de minimis rule described in section 4.02(2) of this notice, Factory A satisfies the de minimis rule described in section 4.02(2) of this notice and Company A may treat the entire square footage of Factory A as satisfying the integral part requirement.

Therefore, Factory A’s entire unadjusted depreciable basis of $60,000,000 is allocable to eligible property because (i) Factory A is nonresidential real property, (ii) Factory A is MACRS property, (iii) the entire square footage of Factory A is treated as used by Company A as an integral part of a QPA due to the application of the de minimis rule in section 4.02(2) of this notice, (iv) Factory A’s original use commenced with Company A, (v) Factory A’s construction began after January 19, 2025, and before January 1, 2029, (vi) Factory A is placed in service after July 4, 2025, and before January 1, 2031, (vii) Factory A is not ADS property, and (viii) Factory A is not ineligible property. Accordingly, Company A has QPP of $50,000,000, equal to the amount of eligible property designated as QPP by Company A on the election statement filed with its timely filed original Federal income tax return.

(3) Example 3 . (a) Facts . Company A, a calendar-year taxpayer, previously placed in service a building (Factory B) during its taxable year ended December 31, 2023, and has since used Factory B to conduct manufacturing activities which constitute a QPA (as defined in section 5 of this notice). No activities are conducted in, or take place within, Factory B except for Company A’s manufacturing activities and Factory B does not contain any space that is ineligible property under section 4.07 of this notice.

In May 2028, Company A begins construction of an upgrade to Factory B’s power distribution system (Electrical System Upgrade) and places the Electrical System Upgrade in service in June 2028. The cost of the Electrical System Upgrade is $2,000,000, which Company A capitalizes pursuant to § 1.263(a)-3. The Electrical System Upgrade is qualified improvement property under § 168(e)(6).

(b) Analysis . Under section 4.03(1)(b) of this notice, Factory B and the Electrical System Upgrade are treated as separate units of property. However, because Factory B and the Electrical System Upgrade operate as an integrated facility and are physically located on the same piece of land, Factory B and the Electrical System Upgrade may be treated as a single unit of property under section 4.03(2) of this notice for purposes of satisfying the integral part requirement. Accordingly, whether the Electrical System Upgrade satisfies the integral part requirement, either in whole or in part, is determined by reference to whether Factory B satisfies the integral part requirement, either in whole or in part.

The entire unadjusted basis of the Electrical System Upgrade of $2,000,000 is allocable to eligible property because (i) the Electrical System Upgrade is nonresidential real property, (ii) the Electrical System Upgrade is MACRS property, (iii) all of Factory B is used by Company A as an integral part of a QPA, (iv) the Electrical System Upgrade’s original use commenced with Company A, (v) the Electrical System Upgrade’s construction began after January 19, 2025, and before January 1, 2029, (vi) the Electrical System Upgrade is placed in service after July 4, 2025, and before January 1, 2031, (vii) the Electrical System Upgrade is not ADS property, and (viii) the Electrical System Upgrade is not ineligible property. Accordingly, Company A may designate up to $2,000,000 of the eligible property as QPP if it does so in the manner provided in section 4.09 of this notice in an election made in the time and manner provided in section 7 of this notice. In addition, Company A is treated as having made an election under § 168(k)(7) not to deduct the additional first year depreciation under § 168(k) with respect to any portion of the unadjusted depreciable basis of the Electrical System Upgrade which Company A designates as QPP in an election under section 7 of this notice.

(4) Example 4 . (a) Facts . The facts are the same as in Example 3 . In December 2028, Company A performs routine maintenance on Factory B’s electrical system at a cost of $100,000. Company A elects to treat the maintenance cost as an amount paid or incurred to improve the electrical system and capitalizes such cost under § 1.263(a)-3(n). The capitalized maintenance costs are qualified improvement property under § 168(e)(6).

(b) Analysis . Under section 4.03(1)(b) of this notice, Factory B and the capitalized maintenance costs are treated as separate units of property. However, because Factory B and the capitalized maintenance costs operate as an integrated facility and are physically located on the same piece of land, Factory B and the capitalized maintenance costs may be treated as a single unit of property under section 4.03(2) of this notice for purposes of satisfying the integral part requirement. Accordingly, whether the capitalized maintenance costs satisfy the integral part requirement is determined by reference to whether Factory B, either in whole or in part, satisfies the integral part requirement.

The entire unadjusted depreciable basis of the capitalized maintenance costs of $100,000 is allocable to eligible property because (i) the capitalized maintenance costs are nonresidential real property,

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(ii) the capitalized maintenance costs are MACRS property, (iii) all of Factory B is used by Company A as an integral part of a QPA, (iv) the capitalized maintenance costs’ original use commenced with Company A, (v) the capitalized maintenance costs’ construction began after January 19, 2025, and before January 1, 2029, (vi) the capitalized maintenance costs are placed in service after July 4, 2025, and before January 1, 2031, (vii) the capitalized maintenance costs are not ADS property, and (viii) the capitalized maintenance costs are not ineligible property. Accordingly, Company A may designate up to $100,000 of the eligible property as QPP if it does so in the manner provided in section 4.09 of this notice in an election made in the time and manner provided in section 7 of this notice. In addition, Company A is treated as having made an election under § 168(k)(7) not to deduct the additional first year depreciation under § 168(k) with respect to any portion of the unadjusted depreciable basis of the capitalized maintenance costs which Company A designates as QPP in an election under section 7 of this notice.

(5) Example 5 . (a) Facts . Company A, a calendar-year taxpayer, previously placed in service two buildings (Factory B and Factory C) during its taxable year ended December 31, 2023, on a single piece of land located in in the United States and has since used Factory B and Factory C to conduct manufacturing activities which constitute a QPA (as defined in section 5 of this notice). No activities are conducted in, or take place within, Factory B and Factory C except for Company A’s manufacturing activities and Factory B and Factory C do not contain any space that is ineligible property under section 4.07 of this notice.

In 2026, Company A, begins construction on a new building (Building A) which is located on a contiguous piece of land to Factory B and Factory C. Building A will be used to store raw materials and other manufacturing inputs used or consumed during the manufacturing activities taking place within Factory B and Factory C. By applying rules consistent with § 1.168(k)-2(b)(5)(iv)(B), Company A determines that construction of Building A began in May 2026. Construction of Building A was completed in March 2027, and Building A was placed in service in April 2027. Upon completion, Building A has an unadjusted depreciable basis of $20,000,000. No activities are conducted in, or take place within, Building A except for Company A’s storage of raw materials and other manufacturing inputs and Building A does not contain any space that is ineligible property under section 4.07 of this notice. Building A is not subject to the alternative depreciation system under § 168(g).

(b) Analysis . Under section 4.03(1)(a) of this notice, Building A, Factory B, and Factory C are each treated as a separate unit of property. However, as Building A, Factory B, and Factory C operate as an integrated facility (as evidenced by their actual operation) and are physically located on contiguous pieces of land, under section 4.03(2) of this notice, Company A may treat all three buildings as a single unit of property for purposes of satisfying the integral part requirement. Accordingly, Building A satisfies the integral part requirement because, when its activities are combined with the activities of Factory

B and Factory C, Building A is used as in integral part of a QPA (as defined in section 5 of this notice).

Building A’s entire unadjusted depreciable basis of $20,000,000 is allocable to eligible property because (i) Building A is nonresidential real property, (ii) Building A is MACRS property, (iii) Building A is used by Company A as an integral part of a QPA because Building A, Factory B, and Factory C are an integrated facility, (iv) Building A’s original use commenced with Company A, (v) Building A’s construction began after January 19, 2025, and before January 1, 2029, (vi) Building A is placed in service after July 4, 2025, and before January 1, 2031, (vii) Building A is not ADS property, and (viii) Building A is not ineligible property. Accordingly, Company A may designate all or any portion of the eligible property as QPP if it does so in the time and manner provided in section 4.09 of this notice in an election made in the manner provided in section 7 of this notice.

(6) Example 6 . (a) Facts . In 2027, Company C, a calendar-year taxpayer, begins constructing a building (Factory D), in the United States which Company C will use in its trade or business as an automobile plant. Company C will use Factory D to assemble and combine engines, transmissions, chassis, and other produced subcomponents and purchased inputs into a finished automobile using various processes, including molding, welding, stamping, and other similar activities, that materially change the form or function of the input materials and components such that they are distinguishable from, and cannot be readily returned to, their original state. By applying rules consistent with § 1.168(k)-2(b)(5) (iv)(B), Company C determines that construction of Factory D began in August 2027. Construction of Factory D was completed in September 2029, and Factory D was placed in service in October 2029. Upon completion, Factory D has an unadjusted depreciable basis of $60,000,000. No portion of Factory D is used to perform activities described in section 4.07 of this notice. Factory D is not subject to the alternative depreciation system under § 168(g).

(b) Analysis . Company C’s trade or business activity conducted in Factory D is manufacturing, as defined in section 5.02(5) of this notice, and constitutes a QPA under section 5.01(1) of this notice. Factory D is eligible property because (i) it is nonresidential real property, (ii) it is MACRS property, (iii) all of Factory D is used by Company C as an integral part of a QPA, (iv) its original use commenced with Company C, (v) its construction began after January 19, 2025, and before January 1, 2029, (vi) it is placed in service after July 4, 2025, and before January 1, 2031, (vii) it is not ADS property, and (viii) it is not ineligible property. Accordingly, Company C may designate up to $60,000,000 of the eligible property’s unadjusted depreciable basis as QPP provided it does so in the manner provided in section 4.09 of this notice in an election made in the time and manner provided in section 7 of this notice.