Nestled all snug in the many pages of the One Big Beautiful Bill Act is a new tax benefit that probably has not received the attention it deserves. New I.R.C. § 168(n) allows taxpayers to immediately expense the cost of constructing or acquiring certain nonresidential real property used in the manufacturing, production, or refining of a broad range of qualified products.
The definition of "manufacturing" or "refining" for purposes of this provision may encompass businesses that do not consider themselves to be engaged in such activities. As discussed below, the key requirement is activity that results in the "substantial transformation" of almost any kind of tangible personal property (a "qualified production activity"). That definition, on its face, could cover many businesses—from a wholesale coffee company, which transforms raw green beans into their aromatic roasted form, to an LNG facility, which transforms natural gas into transportable liquid.
Important limits on the amount of immediate capital expenditure recovery include the following: (1) the nonresidential real property must be used as an integral part of the qualifying activity; and (2) the acquisition or construction of the nonresidential real property must close or commence (as applicable) before January 1, 2029. How to determine the portions of a building that are "integral" to the qualifying activity, and how to distinguish between the repair of existing nonresidential real property and the construction of such property are significant questions that the statute does not answer.
Such questions may be addressed through regulations and other administrative guidance. The U.S. Treasury's 2025-2026 priority guidance plan includes I.R.C. § 168(n). Thus, we expect to see at least some questions on I.R.C. § 168(n) addressed in 2026.
If you are engaged in a business that might be engaged in a "qualified production activity" and are considering a capital-intensive improvement project for that activity within the January 1, 2029 deadline, you should seek advice on whether that project meets—or could be structured to meet—the I.R.C. § 168(n) eligibility requirements. Seeking informal guidance from the U.S. Treasury and/or the IRS may be appropriate for projects whose qualifications are unclear.
Background and Congressional Intent
Before the enactment of I.R.C. § 168(n), nonresidential real property used in manufacturing, production, or refining activities generally was depreciated over 39 years. In adopting I.R.C. § 168(n), Congress apparently believed that "the 39-year depreciation period for nonresidential real [property] discourages business investment in factories, buildings, and other structures in the United States [and thus] allowing businesses to elect to immediately expense certain nonresidential property used in manufacturing, agricultural production, chemical production, and refining will strengthen the industrial capacity of the United States, promote capital investment and modernization, and facilitate job creation." H.R. Rep. No. 119‑106, at 1594 (2025).
To be eligible for immediate expensing, the nonresidential real property must meet the definition of "qualified production property," or QPP.
What Counts as Qualified Production Property?
QPP includes the portion of nonresidential real property that:
- Is used by the taxpayer as an integral part of manufacturing, production (limited by statute to agricultural and chemical production), or refining
- Has original use beginning with the taxpayer (with special rules for recently acquired property)
- Whose acquisition must close or whose construction must commence (as applicable) after January 19, 2025, and before January 1, 2029
- Is placed in service before January 1, 2031
- Is designated by the taxpayer through a timely election.
QPP does not include rental real estate unless the owner itself performs the qualifying activity. It also does not include portions of the real property used for non-qualifying activity purposes, such as office, administrative, engineering, software development, sales, parking, or lodging. It also excludes property subject to other bonus depreciation regimes or to the alternative depreciation system.
What Constitutes a Qualifying Activity?
A qualifying activity must result in the "substantial transformation" of tangible property—i.e., the creation of a new and different product. Examples from U.S. Treasury regulations include transforming wood pulp into paper, steel rods into screws, and fresh fish into canned fish (Treas. Reg. § 1.954‑3(a)(4)(ii)). Activities such as mere assembly, packaging, storage, or minor finishing do not qualify. Because U.S. Treasury and IRS guidance—including regulations—has not yet been issued, taxpayers and advisors must make reasoned, supportable determinations based on existing law. Engaging with our Tax Policy Group may also help businesses explore whether guidance could be developed that addresses their particular facts or industry considerations.
Planning Opportunities
- Immediate expensing of qualifying real estate
- Significant first‑year tax savings and improved project feasibility
- Enhanced cash‑flow advantages and
- Stronger incentives to construct or renovate qualifying facilities within the statutory window
Given the January 1, 2029 deadline for construction and acquisition activities, businesses, developers, and investors should begin evaluating current and planned projects now and consider modeling potential tax benefits under I.R.C. § 168(n).