2026 Tax Alert: New IRS guidance allows immediate expensing of certain production facilities

The IRS has released new guidance that could significantly accelerate tax deductions for manufacturers investing in U.S. production facilities.

Under a provision enacted as part of the One Big Beautiful Bill Act, businesses may be able to deduct 100% of the cost of certain production buildings and infrastructure in the year they are placed in service, rather than depreciating those costs over several decades. This guidance applies to new or expanded domestic manufacturing, production, and refining facilities, aiming to encourage onshoring and capital investment in U.S. operations.

What This Means for Manufacturing Business Owners

Manufacturers that are building new facilities, expanding or upgrading existing plants, bringing operations back to the U.S., or making significant investments in production space may be able to accelerate deductions and improve near-term cash flow.

Instead of recovering building costs slowly over time, qualifying businesses can potentially expense the full cost upfront.

What Types of Facilities May Qualify?

The benefit generally applies to production-focused portions of nonresidential buildings used for qualified manufacturing, production, or refining activities, including manufacturing plants, processing or refining facilities, and integrated production lines.

To qualify, the space must be directly tied to making, producing, or refining a product, rather than supporting general business operations.

What Counts as a Qualified Production Activity?

To determine whether an activity qualifies, the IRS outlines specific definitions for qualified products and the types of activities that meet the standard.

• Qualified Product: Any tangible personal property, excluding food or beverages prepared in the same building as a retail establishment where they are sold.
• Manufacturing: Involves materially changing the form or function of tangible personal property to create a new product held for sale, lease, or rent.
• Production: Limited to agricultural and chemical activities that result in a qualified product through a defined production process.
• Refining: Processes that purify or upgrade a substance into a more useful or higher-value product, such as processing crude oil or purifying metals.

In practical terms, qualifying activities transform raw materials or components into a new product. Packaging, labeling, storage, or simple assembly alone does not qualify. Activities that directly support production, such as receiving and handling raw materials or managing the production process, may qualify when they are integral to production and occur within the same facility.

Qualifying vs. Nonqualifying Space

The deduction generally applies only to production-focused areas of a nonresidential building.

Spaces That Typically Qualify

• Production floors
• Areas used to receive and store raw materials
• Integrated production support space necessary to complete manufacturing

Spaces That Do Not Qualify

• Offices or administrative areas
• Sales and marketing space
• Research or engineering departments
• Parking structures
• Lodging
• Warehouses used only to store finished goods

If a facility includes both production and nonproduction space, only the production-related portion is eligible. However, if at least 95% of the building is used for qualifying production activities, the entire facility may qualify.

Timing and Eligibility Windows

To qualify, projects generally need to fall within the following timeframes:

• Construction must begin after January 19, 2025, and before January 1, 2029
• The facility must be placed in service after July 4, 2025, and before January 1, 2031
• The facility must be located in the U.S. or a U.S. territory

These dates make current and near-term projects especially relevant when evaluating new builds or expansions.

Ongoing Use Requirements

The benefit is subject to ongoing use conditions. If a facility that received the full upfront deduction stops being used for production within 10 years, a portion of the tax benefit may need to be repaid. As a result, how the facility is expected to be used over time is an important factor when deciding whether to claim the deduction.

Why This Is a Significant Opportunity

Historically, manufacturers have recovered the cost of production buildings over long depreciation periods. This guidance allows qualifying production facilities to recover those costs immediately.

For many manufacturers, this can:

• Improve cash flow during expansion
• Lower the after-tax cost of major capital investments
• Make onshoring or facility upgrades more financially attractive

We Can Help

Determining whether a project qualifies requires evaluating how the facility is designed and used, which areas directly support production, and whether expected future use aligns with IRS requirements.

Our team works with manufacturers to evaluate projects, estimate the tax impact, and support documentation under the current guidance. While additional regulations are expected, businesses may rely on the existing guidance now when planning qualifying investments.

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The information provided in this communication is of a general nature and should not be considered professional advice. You should not act upon the information provided without obtaining specific professional advice. The information above is subject to change.