IRS Just Dropped a Massive Tax Win: Businesses Can Write Off 100% of Factory Costs

The Internal Revenue Service (IRS), together with the US Department of the Treasury, has released new guidance explaining how businesses can claim a 100 percent depreciation deduction for certain production facilities.

The clarification comes through Notice 2026-16, issued under a new tax law known as the One Big Beautiful Bill (OBBB). While the law created the incentive, many technical details were unclear until this notice was published. With the guidance now available, businesses can rely on the interim rules immediately, even before final regulations are issued.

What the 100% Deduction Allows

Under the new rule, businesses may deduct up to 100 percent of the cost of qualified production property in the same year the property is placed in service. This means eligible companies can write off the full cost of qualifying production buildings upfront, instead of spreading depreciation deductions over several decades under normal tax rules.

Importantly, this does not eliminate depreciation entirely. Instead, it provides 100 percent accelerated depreciation for qualifying property. For capital-intensive industries, this significantly improves short-term cash flow and may accelerate investment decisions.

What Counts as Qualified Production Property?

The deduction applies only to qualified production property, which generally includes:

• Non-residential real estate
• Factory buildings
• Manufacturing facilities
• Chemical production plants
• Agricultural production facilities
• Refining sites

A key requirement is that the property must be directly used in an active production activity. The production process must result in a substantial transformation of a product. Buildings used solely for storage, distribution, or administrative purposes do not qualify. Additionally, the property must be directly connected to the production activity to meet eligibility standards.

Critical Time Limits Businesses Must Follow

The IRS makes clear that the benefit applies only if the property is:

• Placed in service after July 4, 2025, and
• Placed in service before January 1, 2031

If the building is placed in service outside this window, the 100 percent deduction will not apply. This timeline makes the incentive temporary, giving businesses a defined window to act.

The Deduction Is Not Automatic

Businesses must actively elect to treat their property as qualified production property. The 100 percent deduction does not apply automatically. Taxpayers must follow the election procedures outlined in Notice 2026-16 to claim the benefit.

Mixed-Use Property and Related Party Rules

The notice also explains how to calculate deductions when a building is used partly for production and partly for other purposes. It includes rules covering:

• Allocation methods for mixed-use properties
• Transactions involving related parties
• Calculation methods for determining eligible basis

These provisions are designed to prevent misuse while allowing legitimate claims.

Recapture Risk: A Key Warning

The IRS warns that if a property later stops qualifying as production property, businesses may be required to repay part of the tax benefit. This would occur through depreciation recapture, meaning some of the previously claimed deduction could become taxable again. Companies considering the incentive must evaluate long-term operational plans carefully.

Public Comments and Future Regulations

The IRS and Treasury have confirmed that taxpayers may rely on this interim guidance immediately. However, proposed regulations will follow. The agencies are accepting public comments for 60 days from the date the notice was issued before final rules are finalized. Further technical clarifications may be introduced in the final regulations.