SECTION 5. QUALIFIED — Internal Revenue Bulletin 2026-11

PRODUCTION ACTIVITY

.01 Qualified production activity . (1) In general . The term qualified pro- duction activity (QPA) means the man

ufacturing, production, or refining of a qualified product. A trade or business activity of a taxpayer does not constitute manufacturing, production, or refining of a qualified product unless the trade or business activity of such taxpayer results in a substantial transformation of the property comprising the qualified product (as defined in section 5.02(9) of this notice). A manufacturing, production, or refining activity (for example, a manufacturing or production subprocess), or a related activity, that does not itself give rise to a substantial transformation of the property comprising a qualified product may nevertheless be included in a QPA, or will not cause a taxpayer to fail to have a QPA, if such activity meets the requirements of section 5.01(2) or (3) of this notice.

(2) Essential activities . (a) In general . A QPA includes any manufacturing, production, or refining activity that does not result in a substantial transformation of the property comprising a qualified product if the activity is essential to the completion of the QPA. A manufacturing, production, or refining activity is essential to the completion of a QPA if:

(i) the activity occurs within the same property, or within the same integrated facility (as determined under section 4.03(2) of this notice), in which the substantial transformation of the property comprising the qualified product occurs;

(ii) the activity does not occur within ineligible property described in section 4.07(1) of this notice; and (iii) without the activity, the substantial transformation of the property comprising the qualified product:

(A) cannot occur, (B) would result in an end product that is different in quality than the intended qualified product, or

(b) Treatment of storage space and loading bays .

(i) Storage of raw materials . The receiving and storage of raw materials or other inputs to be used or consumed during a QPA are activities essential to the QPA if they are conducted in, or take place within, the same property, or within the same integrated facility (as determined

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under section 4.03(2) of this notice), as the QPA.

(ii) Storage of other items . Any other storage activity not described in section 5.01(2)(b)(i) of this notice, such as the storage of finished products, is not an activity essential to a QPA.

(3) Related activities . (a) In general . A taxpayer’s trade or business activity will not fail to be a QPA if the individuals performing or supervising the manufacturing, production, or refining activities described in either section 5.01(1), (2)(a), or (2)(b)(i) of this notice also perform, or are otherwise involved in, activities related to the QPA if: (i) the related activity occurs within the same property, or within the same integrated facility (as determined under section 4.03(2) of this notice) in which the substantial transformation of the property comprising the qualified product occurs and (ii) the related activity does not occur within ineligible property described in section 4.07(1) of this notice. The following activities are examples of other trade or business activities that may be related to a QPA:

(i) Oversight and direction of the manufacturing, production, or refining activities that result in the substantial transformation of the property comprising a qualified product;

(ii) Material selection, vendor selection, or control of the raw materials or work-in-process that are substantially transformed into a qualified product;

(iii) Management of manufacturing, production, or refining costs or capacities attributable to the manufacturing, production, or refining activities that result in a substantial transformation of the property comprising a qualified product (for example, cost reduction or efficiency initiatives associated with the manufacturing, production, or refining activities that result in a substantial transformation of the property comprising a qualified product); or

(iv) Developing, or directing the use or development of, product design and design specifications, as well as trade secrets, technology, or other intellectual property used in conducting a manufacturing, production, or refining activity that results in a substantial transformation of the property comprising the qualified product.

(b) No substantial transformation . If a taxpayer’s trade or business activity within a property or portion thereof includes only activities described in section 5.01(3)(a) (i)-(iv) of this notice, the taxpayer’s trade or business activity that takes place within that property or portion thereof does not result in substantial transformation of the property comprising a qualified product. Accordingly, the taxpayer’s trade or business activity within that property or portion thereof will not be a QPA.

(4) Ownership of the qualified prod- uct . For purposes of determining whether a taxpayer’s trade or business activity is a QPA, whether the taxpayer is the tax owner of the qualified product resulting from the QPA is not taken into account to determine whether the taxpayer’s trade or business activity is a QPA. For example, a trade or business activity conducted by a taxpayer in which it enters into contract manufacturing arrangements to manufacture, produce, or refine a qualified product for its customers, but under which the taxpayer does not own the resulting qualified product, constitutes a QPA if such activity otherwise meets the definitions and rules provided in this section 5.

.02 Defined terms . For purposes of this notice:

(1) Production . The term production means either agricultural production or chemical production.

(2) Qualified product . The term quali- fied product means any tangible personal property, except any food or beverage prepared in the same building as a retail establishment in which such property is sold.

(3) Tangible personal property . The term tangible personal property has the same meaning as in § 1.48-1(c).

(4) Retail establishment . The term retail establishment means a retail sales facility as defined in § 1.263A-3(c)(5)(ii) (B).

(5) Manufacturing . The term man- ufacturing means to materially change the form or function of tangible personal property, including parts and components, to create a new item of tangible personal property that is held for rent, lease, or sale to customers in the ordinary course of a trade or business. The form or function of the raw materials, elements, parts, components, or other tangible personal property

used as inputs is considered to be materially changed if, at the completion of the processes giving rise to the new item of tangible personal property, the materials, elements, parts, components or other inputs have been transformed such that they are distinguishable from, and cannot readily be returned to, their original state. In no event will a change in form or function resulting solely from packaging, repackaging, labeling, minor assembly operations, or a combination thereof, be considered a material change to the form or function of tangible personal property.

(6) Refining . The term refining means to purify a substance into a useful and higher-value product. Examples of refining include—

(a) Removing free fatty acids and other impurities from animal fats by degumming, decolorization, deacidification, and deodorization;

(b) Processing petroleum, liquid hydrocarbons and other products from crude oil by using fractionation, straight distillation of crude oil, and/or cracking;

(d) Processing vegetable oils from plant material by removing free fatty acids, phospholipids, pigments, off-flavors, and other impurities;

(e) Processing vegetable, oilseed, and tree nut oils from purchased oils, such as by degumming and neutralization;

(f) Wet corn milling; (g) Processing cane or beet sugar from raw cane or beet sugar;

(h) Removing remaining impurities and moisture from animal fat, bones, and meat scraps through techniques like filtration and bleaching;

(i) Processing tar paving, roofing, and saturated materials from crude petroleum and manufacturing asphalt;

(j) Extracting alumina (aluminum oxide) generally from bauxite ore;

(k) Processing liquified natural gas or chemical feedstocks from natural gas;

(l) Recovering copper or copper alloys from scrap; and

(m) Recovering nonferrous metals (except copper and aluminum) from scrap.

(7) Agricultural production . (a) In general . The term agricultural production means the process of cultivat

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or business activity conducted in, or taking place within, the property will be treated as a QPA under section 5.01 of this notice if (a) the principal business activity code that the taxpayer, or the relevant trade or business of the taxpayer, used on its most recently filed Federal income tax return (for example, 2024 Form 1040, Schedule C, line B; 2024 Form 1065, Item A; 2024 Form 851, Part II, or 2024 Form 1120, Schedule K, line 2a), filed before February 19, 2026, is an applicable NAICS code listed in section 5.03(2) of this notice and (b) such activity results in, or is otherwise essential to (as determined under 5.01(2) of this notice), the substantial transformation of the property comprising a qualified product (as defined in section 5.02(9) of this notice). For a taxpayer that does not have such a filed Federal income tax return because it is filing its first Federal income tax return on or after February 19, 2026, the taxpayer must reasonably determine that its principal business activity code is an applicable NAICS code on its first Federal income tax return to be eligible for the safe harbor provided in this section 5.03.

(2) Applicable NAICS code . An applicable NAICS code means any of the NAICS codes listed under sectors 31, 32, or 33, or under subsectors 111 or 112, that appear in the North American Industry Classification System (NAICS), United States, 2022, published by the Office of Management and Budget (OMB), Executive Office of the President. ²

.04 Example . The following example illustrates the rules set forth in section 5 of this notice:

(1) Facts . Company B owns Factory B, a building, and uses Factory B to process tomatoes, onions, garlic, and other ingredients (collectively the sauce ingredients ) into jarred tomato sauce for sale in grocery stores ( jarred sauce ). The jarred sauce is a qualified product, and the sauce ingredients are the property comprising the qualified product. The physical space of Factory B exclusively contains the following: a loading bay used to receive the sauce ingredients ( ingredient receiving ); a section used to store the sauce ingredients received at the loading bay ( ingredient storage ); a section used to, as applicable to each ingredient, inspect, sort, clean, blanch, peel, chop, mince, and/or otherwise prepare the sauce ingredients for further processing ( ingredi- ent preparation ); a manufacturing space in which the prepared ingredients are combined, blended, cooked, cooled, preserved, and sealed in labeled jars ( sauce processing and sauce jarring ); and a section used to

ing the ground, typically in fields or large acreage, and includes:

(i) Preparing the soil; (ii) Planting seeds; (iii) Raising, cultivating, irrigating, and harvesting crops for sale, rent, or lease to customers; and

(iv) Breeding, rearing, feeding, and managing livestock for sale, rent, or lease to customers.

(b) Exclusions . The term agricultural production does not include—

(i) The raising of animals that are not livestock; or

(ii) Activities that benefit persons engaged in agriculture when these activities are not agricultural production, such as food marketing.

(c) Livestock . The term livestock includes cattle, hogs, horses, mules, donkeys, sheep, goats, captive fur-bearing animals, chickens, turkeys, pigeons, and other poultry.

(8) Chemical production . The term chemical production means a chemical process whereby a product is formulated from organic and inorganic raw materials, including preparing raw materials for reaction, combining materials in a reactor to form a new substance, isolating the final product from byproducts, intermediates, and other substances, and purifying the final product. Examples of chemical production include—

(a) Basic inorganic chemical manufacturing, such as petrochemical manufacturing, industrial gas manufacturing, and synthetic dye and pigment manufacturing;

(b) Basic organic chemical manufacturing, such as ethyl alcohol manufacturing and cyclic crude, intermediate, and gum and wood chemical manufacturing;

(c) Manufacturing synthetic resins, plastics materials, and non-vulcanizable elastomers and mixing and blending resins on a custom basis;

(d) Manufacturing nitrogenous or phosphatic materials and mixing with other ingredients into fertilizers;

(e) Manufacturing pharmaceutical products intended for internal and external consumption in such forms as ampoules, tablets, capsules, vials, ointments, powders, solutions, and suspensions;

(f) Manufacturing adhesives, glues, and caulking compounds; and

(g) Manufacturing soaps, detergents, polishes, surface active agents, textile and leather finishing agents, and other sanitation goods.

(9) Substantial transformation of the property comprising a qualified product .

(a) In general . The term substantial transformation of the property compris- ing a qualified product means the further manufacturing, production, or refining of the constituent elements, raw materials, inputs, or subcomponents into a final, complete, and distinct item of property in the hands of the taxpayer that is fundamentally different from the original constituent elements, materials, inputs, or subcomponents.

(b) Examples of substantial trans- formation of the property comprising a qualified product . Examples of substantial transformation of the property comprising a qualified product include the conversion of wood pulp to paper, steel rods to screws and bolts, and freshly caught tuna fish to canned tuna.

(c) Example of an activity that does not result in a substantial transformation of the property comprising a qualified prod- uct . An example of an activity that does not result in a substantial transformation of the property comprising a qualified product is the grouping and packaging of multiple finished goods for sale as a single item, such as gift baskets, subscription boxes, and bundled electronics.

(d) No application to other provisions . The definition of the term substantial transformation of the property compris- ing a qualified product set forth in section 5.02(9)(a) of this notice, and the illustrative examples contained in this notice, are limited to determinations under § 168(n), and do not apply with respect to determinations of whether property has been substantially transformed for any other purpose, including for purposes of any other provision of the Code or the regulations thereunder.

.03 Safe harbor for property placed in service during 2025 .

(1) In general . Notwithstanding the definitions in section 5.02(5), (6), (7), and (8) of this notice, for property placed in service after July 4, 2025, and on or before December 31, 2025, the taxpayer’s trade

2 https://www.census.gov/naics/reference_files_tools/2022_NAICS_Manual.pdf.

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store the jarred sauce prior to shipping to customers ( sauce storage ).

(a) Ingredient receiving and ingredient storage. Individuals working in the ingredient receiving and storage sections of Factory B exclusively engage in receiving and storage related activities. The form or function of any sauce ingredient is not materially changed from its original state into a new item of tangible personal property through the activities conducted in the loading bay and ingredient storage sections of Factory B.

(b) Ingredient preparation . During the ingredient preparation stage, the forms of the sauce ingredients are materially changed from their original state such that new items of tangible personal property result ( prepared ingredients ), but further processing is required beyond the ingredient preparation stage to arrive at a final, complete, and distinct item of property ( jarred sauce ) that is fundamentally different from the original inputs. However, without this ingredient preparation stage, the sauce processing stage would result in an end product that is different in quality or quantity from the intended qualified product. In addition to performing the inspecting, sorting, cleaning, blanching, peeling, chopping, mincing, and other preparation activities, the individuals working in ingredient preparation also perform tests to ensure that the prepared ingredients are of the appropriate quality before they are further processed as a part of the sauce processing and jarring activities.

(c) Sauce processing and sauce jarring. During the sauce processing and sauce jarring stage, the forms of the prepared ingredients are further materially changed into the final, complete, and distinct item of property ( jarred sauce ). The individuals working in sauce processing and sauce jarring also perform oversight activities to ensure the manufacturing process occurs as intended.

(d) Sauce storage . Individuals working in this section of Factory B exclusively engage in storage related activities of the jarred sauce. The form or function of the jarred sauce is not further materially changed through the activities conducted in this section of Factory B.

(2) Analysis. (a) Existence of a manufacturing activity in Fac- tory B . The ingredient preparation, sauce processing, and sauce jarring activities are manufacturing as defined in section 5.02(5) of this notice as the forms of the ingredients and the prepared ingredients (during the ingredient preparation activities and the sauce processing and sauce jarring activities, respectively) are materially changed into a new item of tangible personal property (the jarred sauce), which Company B sells to customers in the ordinary course of its trade or business. Company B’s other activities conducted in Factory B (the ingredient receiving, ingredient storage, and sauce storage activities) are not manufacturing under section 5.02(5) of this notice as the forms or functions of the sauce ingredients and the jarred sauce are not materially changed during such activities.

(b) Existence of a QPA in Factory B . While both the ingredient preparation and sauce processing and jarring stages are manufacturing, a substantial transformation of the property comprising a qualified product occurs only during the sauce processing and

sauce jarring stage because only in this stage are the constituent inputs (the prepared ingredients) further manufactured into a final, complete, and distinct item of property (jarred sauce) that is fundamentally different from the original constituent inputs (the sauce ingredients). Under section 5.01(1) of this notice, Company B’s sauce processing and jarring activity conducted in Factory B is a QPA.

(c) Scope of Factory B’s QPA . (i) Ingredient preparation . The material change occurring in the ingredient preparation stage is not sufficient to constitute a substantial transformation of the sauce ingredients because the prepared ingredients do not represent a final, complete, and distinct item of property that is fundamentally different from the sauce ingredients. However, the ingredient preparation stage is an essential activity under section 5.01(2) of this notice as (A) it is a manufacturing activity that occurs within the same property (Factory B) as the substantial transformation of the property, (B) it does not occur in ineligible property described in section 4.07(1) of this notice, and (C) without the ingredient preparation stage, the sauce processing and jarring stage would result in an end product that is different in quality or quantity from the intended end product. Accordingly, under section 5.01(2)(a) of this notice, the ingredient preparation activities are essential activities, and thus are included in Company B’s QPA conducted in Factory B.

(ii) Loading bay and ingredient storage activi- ties . The ingredient receiving activities at the loading bay and the ingredient storage activities relate to raw materials to be consumed in the QPA (the sauce ingredients) and are conducted in the same property as the QPA (Factory B). Accordingly, the ingredient receiving and ingredient storage activities are essential activities under section 5.01(2)(b) of this notice and thus are included in Company B’s QPA conducted in Factory B.

(iii) Related activities . In addition to the core activities conducted in the ingredient preparation and sauce processing and sauce jarring stages, the individuals working in those sections of Factory B also perform quality testing and oversight activities. As the quality testing and oversight activities occur within the same property in which the substantial transformation of property comprising the qualified product occurs (Factory B) and do not occur within ineligible property under section 4.07(1) of this notice, the quality testing and oversight activities will not cause Company B to fail to have a QPA under section 5.01(3)(a) of this notice.

(iv) Ineligible property . Under section 5.01(2) (b)(ii) of this notice, storage of finished products is not an essential activity, and under section 4.07(2) of this notice, any property, or a portion thereof, used to conduct storage activities described in section 5.01(2)(b)(ii) of this notice is ineligible property. Accordingly, the portion of Factory B used to conduct the sauce storage is ineligible property.

(v) Summary of Factory B’s QPA . The scope of the QPA conducted in, or taking place within, Factory B thus includes the ingredient receiving and storage stage, the ingredient preparation stage, and the sauce processing and jarring stages, including the quality testing and oversight activities performed by individuals working in those sections or stages of Factory B.