IRC 168(k) and 168(n): Permanent Bonus Depreciation and Qualified Production Property Expensing Under OBBBA

OBBBA (signed July 4, 2025) made two major changes to federal depreciation and expensing law. First, it permanently restored 100% bonus depreciation under IRC 168(k)(1)(A) as amended by OBBBA for qualified property (primarily personal property and other short-lived assets) placed in service after January 19, 2025. Second, it enacted an entirely new code section, IRC 168(n), providing 100% immediate expensing for qualified production property: buildings and structural components used predominantly in manufacturing and production, a category of real estate that has never before been eligible for bonus expensing under IRC 168(k). For the enrolled agent, CPA, or tax attorney advising manufacturers, real estate developers, or any capital-intensive client, both provisions require mastery of different property definitions, different timing requirements, a rebuilt state tax landscape with significant decoupling, and recapture exposure that will only materialize years after the deduction is taken.

This guide works through the two provisions in practitioner sequence: what each provision covers and what it does not; the Notice 2026-11 and Notice 2026-16 QPP guidance that governs until proposed regulations are finalized; Section 179 sequencing; IRC 1245 recapture planning; the state conformity landscape by state; and a planning checklist for manufacturers. All specifics are hedged to the applicable code sections, Notices, and IRS.gov. Confirm each item before reliance in any client matter.

Section 1: IRC 168(k) -- Permanent 100% Bonus Depreciation

Background: The TCJA Phase-Down That OBBBA Ended

The Tax Cuts and Jobs Act of 2017 (TCJA) initially allowed 100% bonus depreciation for qualified property placed in service after September 27, 2017, through December 31, 2022. After that, the rate was scheduled to phase down: 80% for property placed in service in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% in 2027. For manufacturers and capital-intensive businesses that had planned multi-year equipment acquisition schedules around the full expensing window, the phase-down created significant tax-planning pressure. OBBBA permanently eliminated the phase-down. Under IRC 168(k)(1)(A) as amended by OBBBA, the 100% bonus depreciation rate is permanently restored for qualified property placed in service after January 19, 2025 (the OBBBA enactment date). Cite IRC 168(k)(1)(A) as amended by OBBBA; hedge all rate and effective-date specifics to IRC 168(k) as amended and IRS.gov.

Property placed in service in 2023 and 2024 (before the OBBBA effective date) was subject to the phased-down rates of 80% and 60%, respectively. OBBBA did not retroactively change the bonus rate for those years. Practitioners should confirm whether any transitional relief or catch-up provisions apply to property that straddled the OBBBA effective date; hedge the availability of any transitional relief to IRC 168(k) as amended and IRS.gov.

What Qualifies: Qualified Property Under IRC 168(k)(2)

"Qualified property" eligible for IRC 168(k) bonus depreciation is defined in IRC 168(k)(2). It generally includes:

• MACRS property with a recovery period of 20 years or less. This captures most personal property: machinery, equipment, computers, vehicles, furniture, and other tangible personal property used in a trade or business. The 20-year ceiling is the critical threshold; property with a longer MACRS recovery period generally does not qualify.
• Certain computer software. Off-the-shelf computer software that is amortized under a 36-month period under IRC 167 is generally eligible. Hedge the precise software category to IRC 168(k)(2) and IRS.gov.
• Qualified improvement property (QIP). QIP is 15-year MACRS property under IRC 168(e)(6) (confirmed by the CARES Act correction of the TCJA drafting error), and it qualifies for IRC 168(k) bonus depreciation. See the QIP note below. Hedge the continued QIP bonus depreciation eligibility to IRS.gov; OBBBA may have modified QIP treatment.
• Certain water utility property and other specified categories. Hedge to IRC 168(k)(2) for the full property category list.

Hedge the complete definition of qualified property to IRC 168(k)(2) as amended by OBBBA and IRS.gov. OBBBA may have also modified specific property categories or added new ones; confirm at IRS.gov before advising clients.

What Does NOT Qualify for IRC 168(k)

The following property generally does not qualify for IRC 168(k) bonus depreciation:

• Buildings and structural components. Nonresidential real property (39-year MACRS) and residential rental property (27.5-year MACRS) are not qualified property under IRC 168(k) because their recovery periods exceed the 20-year ceiling. This is the fundamental reason IRC 168(n) was needed: a manufacturer building a new factory cannot use IRC 168(k) for the building structure itself.
• ADS-required property (IRC 168(g)). Property required to use the alternative depreciation system (ADS) under IRC 168(g) is not eligible for IRC 168(k) bonus depreciation. ADS-required categories include property used predominantly outside the United States, certain listed property not predominantly used in a qualified business use, tax-exempt bond-financed property, and certain farm property. Cite IRC 168(g) for ADS requirements.
• Property placed in service before January 19, 2025, at the 100% rate. The permanently restored 100% rate applies prospectively to property placed in service after the OBBBA enactment date. Earlier-placed property was subject to the applicable phased-down TCJA rate.

Section 2: IRC 168(n) -- New Qualified Production Property Immediate Expensing

Why a New Code Section Was Needed

Prior to OBBBA, there was no federal mechanism for immediately expensing a new manufacturing building. Buildings were (and remain) ineligible for IRC 168(k) bonus depreciation because they have 39-year (nonresidential) or 27.5-year (residential) MACRS recovery periods that exceed the 20-year ceiling in IRC 168(k)(2). A manufacturer building a new factory in 2023 could expense the equipment and machinery under IRC 168(k), but the building shell, structural components, roof, walls, and foundation had to be depreciated over 39 years using straight-line MACRS. OBBBA addressed this asymmetry by enacting IRC 168(n) as a wholly new code section, creating a separate immediate-expensing track for manufacturing and production buildings. IRC 168(n) is not an amendment to IRC 168(k); it is a new and distinct statutory regime with its own property definition, its own eligibility requirements, and its own placed-in-service rules.

What Qualifies as Qualified Production Property (QPP)

Under IRC 168(n) as enacted by OBBBA, qualified production property (QPP) is a building or structural component that is used predominantly in manufacturing, production, or similar qualifying activities as specified in IRC 168(n). The precise statutory definition of QPP, including the scope of "predominantly," the specific qualifying activity categories, and any exclusions, is set forth in IRC 168(n) and has been addressed in IRS Notice 2026-11 and Notice 2026-16. Practitioners must read IRC 168(n) as enacted, Notice 2026-11, and Notice 2026-16 in full to determine whether a specific facility qualifies as QPP. Do not rely on a general characterization of the client's activity as "manufacturing" without confirming it against the statutory definition and applicable Notices.

Mixed-use facilities (buildings used partly in qualifying production activities and partly in non-qualifying activities such as administration, distribution, or retail) present particular classification risk. The "predominantly" standard will determine eligibility, but the precise threshold and allocation methodology are addressed in Notice 2026-11 and Notice 2026-16; hedge the mixed-use analysis in full to those Notices and to IRC 168(n) before advising a client with a mixed-use facility. Do not assume the "more than 50% use" standard from IRC 168(k) automatically applies to IRC 168(n)'s "predominantly" test without Notice confirmation.

The Construction-Start Requirement

To qualify for IRC 168(n) immediate expensing, construction on the QPP must begin after January 19, 2025 (the OBBBA enactment date). Property whose construction began on or before January 19, 2025, does not qualify for IRC 168(n), even if the property is placed in service after that date.

The definition of "beginning of construction" for IRC 168(n) purposes is addressed in Notice 2026-11 and Notice 2026-16. Practitioners familiar with the "physical work" safe harbor and the "5% cost" safe harbor from energy credit guidance (which have historically defined when construction begins for certain credit provisions) should not assume either safe harbor applies to IRC 168(n) without explicit Notice confirmation. Hedge the applicable construction-start standard entirely to IRC 168(n) as enacted, Notice 2026-11, Notice 2026-16, and IRS.gov. Documentation of the construction-start date is critical for audit defense; establish a clear contemporaneous record.

The Placed-in-Service Deadline

IRC 168(n) specifies a placed-in-service deadline: QPP must be placed in service before that deadline to be eligible for the 100% immediate expensing. The specific placed-in-service deadline is set forth in IRC 168(n) as enacted and may be addressed further in Notice 2026-11 and Notice 2026-16. Hedge the placed-in-service deadline entirely to IRC 168(n) and IRS.gov; do not state a specific date without a Notice and IRS.gov hedge. For clients with long construction timelines, tracking the placed-in-service deadline against the anticipated project completion date is a critical planning step.

ADS and IRC 168(n)

Under IRC 168(k), property required to use the alternative depreciation system (ADS) under IRC 168(g) is not eligible for bonus depreciation. Whether ADS-required property is similarly excluded from IRC 168(n) QPP expensing is a separate question. Hedge the ADS treatment under IRC 168(n) to Notice 2026-11, Notice 2026-16, and IRS.gov; do not assume the same ADS exclusion rules from IRC 168(k) automatically apply to IRC 168(n) without Notice confirmation.

Section 3: Notice 2026-11 and Notice 2026-16 -- What Practitioners Must Know

IRC 168(n) is a new statutory provision with no prior regulatory history. The IRS moved quickly to issue preliminary guidance because practitioners and taxpayers need to know whether construction that began in the months immediately following OBBBA's July 4, 2025, enactment qualifies for IRC 168(n) expensing. Two Notices have been issued to address these questions. Practitioners must read both Notices in full before advising any client on a QPP matter. The summaries below describe each Notice's general scope, but the full text governs; do not rely on any summary, including this one, as a substitute for reading the Notices.

IRS Notice 2026-11: Preliminary QPP Guidance

IRS Notice 2026-11 provides preliminary guidance on the IRC 168(n) qualified production property rules. The Notice addresses foundational QPP questions that practitioners needed resolved before any meaningful client advising could occur: including the scope of the QPP definition, the construction-start requirement and what constitutes the "beginning of construction" for IRC 168(n) purposes, the application of the "predominantly" use standard for mixed-use facilities, and initial guidance on the placed-in-service deadline.

Hedge all Notice 2026-11 specifics (including the QPP definition scope, construction-start standards, placed-in-service rules, any safe harbors, and any other guidance positions) to the full text of Notice 2026-11 and IRS.gov. Read the Notice before advising any client; the full text governs, and individual safe harbors or requirements may have preconditions, limitations, or exclusions that a summary cannot capture.

IRS Notice 2026-16: Additional QPP Guidance

IRS Notice 2026-16 provides additional guidance on IRC 168(n), building on and in some respects modifying or clarifying the preliminary positions taken in Notice 2026-11. Notice 2026-16 may address questions that were left open by Notice 2026-11, refine the QPP definition in light of comments or questions received, address specific industry or transaction types, and provide further guidance on the interaction between IRC 168(n) and other Code provisions.

Hedge all Notice 2026-16 specifics to the full text of Notice 2026-16 and IRS.gov. Where Notice 2026-11 and Notice 2026-16 appear to address the same issue, read both in full to determine which controls and whether any later position supersedes an earlier one. Do not assume Notice 2026-11 represents the current IRS position on any specific QPP issue without also checking Notice 2026-16 and any subsequent IRS.gov guidance.

Proposed Regulations: Expected But Not Yet Issued

The IRS has indicated that proposed regulations under IRC 168(n) are forthcoming. When issued, proposed regulations will provide binding guidance on the QPP rules and may supersede, modify, or clarify the positions taken in Notice 2026-11 and Notice 2026-16. Proposed regulations go through a public comment process before being finalized. Hedge the timing and content of any proposed regulations under IRC 168(n) to IRS.gov; regulations had not yet been issued as of this guide's publication date. Practitioners advising clients on large or complex QPP transactions should monitor IRS.gov for proposed regulation developments before finalizing any planning positions or tax return filings.

Section 4: Section 179 Sequencing -- Election Order and Interaction

The Section 179 expensing election under IRC 179 is applied before IRC 168(k) bonus depreciation and before IRC 168(n) QPP expensing. This sequencing rule affects the basis available for the bonus or QPP deduction in Year 1 and must be modeled carefully when a client is acquiring both personal property and a qualifying production facility in the same tax year.

Order of Application

When a taxpayer acquires qualifying property, the order of application is:

1. Step 1: Section 179 election. The taxpayer elects Section 179 expensing on eligible property (up to the applicable dollar limit, subject to the taxable income limitation and investment phase-out). The Section 179 election reduces the property's adjusted basis by the elected amount. Cite IRC 179 generally; hedge the current dollar limit and investment phase-out threshold to IRS.gov (subject to annual inflation adjustment).
2. Step 2: IRC 168(k) on remaining basis (personal property). After Section 179 reduces the basis of personal property, the remaining basis is eligible for IRC 168(k) 100% bonus depreciation (if the property is qualified property placed in service after January 19, 2025).
3. Step 3: IRC 168(n) on remaining basis (QPP buildings). After Section 179 reduces the basis of a QPP building (if Section 179 applies to the QPP building at all; see the real property note below), the remaining basis is eligible for IRC 168(n) 100% expensing.
4. Step 4: Regular MACRS depreciation on any remaining basis. Any basis not captured by Section 179, IRC 168(k), or IRC 168(n) is depreciated under the normal MACRS schedule.

The Section 179 dollar limit and investment phase-out threshold are adjusted annually for inflation. Confirm the current year dollar limit and phase-out threshold at IRS.gov before advising clients. See the IRC 163(j) Business Interest Limitation Practitioner Guide for the interaction between immediate expensing under IRC 168(k) and 168(n) and the adjusted taxable income (ATI) base under the business interest limitation, which is affected when large deductions reduce current-year income.

Section 179 and Real Property: A Critical Distinction

Section 179 applies to personal property and certain real property categories, but it does not apply to all real property in the same way. In particular, Section 179 does not generally apply to land or to building structures that are not categorized as qualified improvement property or another specifically enumerated real property category under IRC 179(d) and related provisions. A QPP building under IRC 168(n) is real property; whether Section 179 applies to a QPP building before IRC 168(n) is applied must be confirmed against IRC 179 and IRS.gov. Do not assume Section 179 is always available as the first step for a QPP building without confirming the IRC 179 eligibility analysis for that specific property type.

For most factory fit-outs, the practical Section 179 question arises at the personal property level (machinery, equipment, fixtures that qualify as personal property). If a client is deploying full Section 179 capacity on personal property for the factory fit-out, the remaining personal property basis gets IRC 168(k) bonus depreciation, and the factory building itself (if it qualifies as QPP) gets IRC 168(n) expensing. Model both Section 179 and no-Section-179 scenarios to identify the optimal combination for each client's taxable income and income limitation constraints.

Section 179 Taxable Income Limitation

The Section 179 deduction is limited to the taxpayer's aggregate taxable income from all active trades or businesses for the year. Excess Section 179 carries forward to future years; it does not create a net operating loss (NOL) in the current year. IRC 168(k) bonus depreciation and IRC 168(n) expensing, by contrast, can produce or increase a net operating loss. For clients near the Section 179 taxable income ceiling, the ability of IRC 168(k) and IRC 168(n) to push below zero may favor shifting more deductions to those provisions. The interaction between Section 179's income limitation and the bonus/expensing provisions requires client-specific modeling. Cite IRC 179(b)(3) for the taxable income limitation; hedge current mechanics to IRS.gov.

Section 5: IRC 1245 Recapture Planning

The Recapture Trap: Front-Loading Deductions Means Back-End Ordinary Income

Every dollar of IRC 168(k) bonus depreciation and every dollar of IRC 168(n) immediate expensing taken in Year 1 is a dollar of potential ordinary income recapture if the property is sold at a gain. Under IRC 1245(a)(1), when section 1245 property (which includes personal property and, under the recapture rules applicable to IRC 168(n) buildings, qualifying manufacturing property) is sold, the lower of the recognized gain or the total amount of depreciation and amortization previously allowed (including bonus depreciation and immediate expensing) is treated as ordinary income rather than capital gain. The capital gain preference that would otherwise apply to appreciated real estate is eliminated to the extent of prior depreciation and expensing.

This recapture rule applies to both IRC 168(k) and IRC 168(n) deductions. It is not a new rule for IRC 168(k): practitioners have long understood that bonus depreciation on personal property creates IRC 1245 recapture potential. The new element introduced by OBBBA is the application of these recapture principles to manufacturing buildings that are expensed under IRC 168(n). A building that would otherwise qualify for IRC 1250 treatment (and potentially 25% unrecaptured Section 1250 gain rates for individuals) is subject to full IRC 1245 recapture when IRC 168(n) expensing is claimed. This is a higher recapture rate than the Section 1250 unrecaptured gain rate.

For detailed analysis of the IRC 1245 and IRC 1250 recapture mechanics, Form 4797 reporting, and cost segregation interactions, see the IRC 1245 and 1250 Depreciation Recapture, Cost Segregation, and OBBBA Bonus Practitioner Guide and the IRC 1245 and 1250 Depreciation Recapture and Form 4797 Practitioner Guide.

IRC 168(k) Recapture: Well-Established Rules

The IRC 1245 recapture rules for property on which IRC 168(k) bonus depreciation was claimed are well-established. Under IRC 1245(a)(1), when personal property on which bonus depreciation has been claimed is sold, the entire amount of the bonus depreciation (plus any regular depreciation taken in later years) is recaptured as ordinary income, up to the recognized gain on the sale. If a piece of manufacturing equipment is purchased for $500,000, fully expensed under IRC 168(k) in Year 1, and sold in Year 3 for $250,000, the entire $250,000 gain is ordinary income under IRC 1245 (because the full $500,000 of prior depreciation exceeds the $250,000 gain). Cite IRC 1245(a)(1) for the recapture rule; confirm the current computation mechanics and Form 4797 reporting at IRS.gov.

IRC 168(n) Recapture: New and Not Yet Fully Settled

IRC 168(n) is a new provision, and while IRC 1245 recapture principles clearly apply to property on which any accelerated expensing deduction is claimed, the specific mechanics of how IRC 1245 recapture applies to QPP buildings expensed under IRC 168(n) should be confirmed under IRC 1245 and any applicable guidance in Notice 2026-11 or Notice 2026-16. Buildings that are expensed under IRC 168(n) are treated as section 1245 property for recapture purposes (rather than section 1250 property), which means the standard 25% unrecaptured Section 1250 gain treatment that might otherwise apply to a straight-line depreciated building does not apply; instead, the full expensed amount is recaptured at ordinary income rates under IRC 1245. Cite IRC 1245; hedge the specific QPP recapture mechanics to IRC 1245 and IRC 168(n) as enacted, and confirm the position under Notice 2026-11 and Notice 2026-16.

Planning Consideration: Short Holding Periods

For clients with anticipated short holding periods, the IRC 168(n) immediate expensing may not produce net after-tax benefit if the deduction will be fully recaptured as ordinary income on a sale within a few years. The benefit of the deduction is the time value of the tax savings in Year 1 compared to the 39-year straight-line MACRS depreciation that would otherwise apply. If the building is sold in Year 3, the full expensed amount is recaptured as ordinary income, and the client has effectively converted what would have been long-term capital gain (at potentially lower rates) into ordinary income. The break-even holding period depends on the taxpayer's marginal ordinary income rate, the applicable capital gain rate, and the discount rate assumed for the time value of the Year 1 tax savings. Model both scenarios before advising clients who may sell the facility within five to ten years of completion. See the Corporate Alternative Minimum Tax (CAMT) Practitioner Guide for the AFSI adjustment implications of large IRC 168(k) and IRC 168(n) deductions for corporations subject to the CAMT.

Section 6: State Conformity -- The Critical Multi-State Issue

State conformity to federal depreciation and expensing rules has been uneven since the original enactment of bonus depreciation under EGTRRA in 2001, and the OBBBA changes have produced another wave of state decoupling. For multi-state manufacturers, the practical consequence of state non-conformity is a two-depreciation-schedule world: the federal return reflects 100% IRC 168(k) bonus or 100% IRC 168(n) expensing in Year 1, while the non-conforming state return depreciates the same asset over its full MACRS life using the state's own rules. This creates Schedule M-1 or M-3 adjustments, state addback requirements, state estimated tax recalculations, and separate state depreciation tracking schedules that must be maintained for years.

State Conformity Table

The table below summarizes the conformity position of five major states as of this guide's publication date. Hedge all positions to the applicable state law and current state agency guidance cited below; confirm the current position before filing. State conformity positions can and do change as states enact additional legislation.

Practical Steps for Multi-State Taxpayers

• Identify every state with filing obligations. Any state in which the taxpayer has nexus and files a return, or may be required to file, is a state where the conformity question must be answered before relying on IRC 168(k) or IRC 168(n) for planning.
• Confirm the current conformity position for each state. Check the applicable state agency website (FTB for California, NYS DTF for New York, Michigan Treasury for Michigan, IDOR for Illinois, Pennsylvania DOR for Pennsylvania) before advising or filing. Do not rely on prior-year research; conformity positions change.
• Maintain two depreciation schedules. In non-conforming states, the federal depreciation schedule (showing the full IRC 168(k) or IRC 168(n) expensing in Year 1 and zero in later years) will diverge from the state depreciation schedule (showing 39-year or other MACRS straight-line depreciation over the full life). Both schedules must be maintained and reconciled at the time of sale for recapture purposes.
• Prepare state addback schedules. Each non-conforming state will require an addback on the state return for the excess of the federal IRC 168(k) or IRC 168(n) deduction over the state-allowable depreciation. Prepare these schedules contemporaneously with the federal return.
• Adjust state estimated tax payments. The state addback effectively increases state taxable income in Year 1. For calendar-year clients, this may require upward adjustment of state estimated tax payments to avoid underpayment penalties in non-conforming states.

Section 7: Planning Checklist for Manufacturers and Real Estate Developers

The following checklist covers the primary planning steps for a manufacturer or real estate developer considering IRC 168(k) and/or IRC 168(n) expensing. Each item references the applicable authority; hedge all specifics to the cited authority and IRS.gov before acting.

• Confirm qualifying use ("predominantly" production). Verify that the facility is used predominantly in qualifying manufacturing, production, or similar activities as defined in IRC 168(n). Administrative areas, showrooms, and distribution areas may not qualify. The mixed-use analysis is addressed in Notice 2026-11 and Notice 2026-16; hedge the "predominantly" standard to those Notices and IRC 168(n) before advising clients with facilities that include non-production space.
• Document the construction-start date (IRC 168(n) projects). The construction-start date must be after January 19, 2025. Establish a contemporaneous record of the construction-start date (signed contracts, first physical work orders, payment records) for audit defense. The IRS may scrutinize construction-start dates for projects that began close to the OBBBA enactment date. Hedge the definition of "beginning of construction" to Notice 2026-11, Notice 2026-16, and IRC 168(n).
• Confirm placed-in-service date against the IRC 168(n) deadline. Track the anticipated project completion and placed-in-service date against the applicable IRC 168(n) deadline. For large construction projects with multi-year timelines, model whether the project will be placed in service before the deadline. Hedge the placed-in-service deadline to IRC 168(n) and IRS.gov.
• Separate costs: personal property (IRC 168(k)) vs. building/structural components (IRC 168(n)). A mixed-asset factory acquisition involves both IRC 168(k)-eligible personal property and IRC 168(n)-eligible building components. Costs must be correctly allocated to each category before applying the applicable provision. Do not apply IRC 168(k) to building components or IRC 168(n) to personal property.
• Commission a cost segregation study. A cost segregation study performed by a qualified engineer can identify and document the portion of a construction project that is personal property (eligible for IRC 168(k)) versus building structure and structural components (potentially eligible for IRC 168(n)). Cost segregation studies remain valuable under the OBBBA framework to maximize IRC 168(k) for accelerated personal property components and to establish the QPP vs. non-QPP split for IRC 168(n) purposes.
• Model Section 179 election scenarios (with and without). Model the optimal Section 179 election amount (and which property to elect on) against the IRC 168(k) and IRC 168(n) deductions available in the same year. Consider the Section 179 taxable income limitation, the income-limitation carryforward, the absence of a net operating loss cap for IRC 168(k) and IRC 168(n), and the client's multi-year income projections. Hedge Section 179 limits to IRS.gov for the current year amounts.
• Run recapture modeling before electing IRC 168(n). For clients with anticipated short holding periods (three to seven years), model the IRC 1245 ordinary income recapture impact of IRC 168(n) expensing against the alternative of 39-year straight-line MACRS depreciation. If the client will sell the facility before the 39-year MACRS deductions add up to the IRC 168(n) amount, the recapture analysis will determine whether IRC 168(n) produces a net benefit or cost after tax. Cite IRC 1245; hedge QPP-specific recapture mechanics to Notice 2026-11, Notice 2026-16, and IRS.gov.
• Identify all state filing obligations and run the conformity analysis. For every state in which the client files, determine the current conformity position for IRC 168(k) and IRC 168(n). Prepare state addback schedules and adjust state estimated payments as needed. Confirm each state's position at the applicable state agency website before filing.
• Consider CAMT and IRC 163(j) interactions (corporate clients). Large IRC 168(k) and IRC 168(n) deductions affect adjusted financial statement income (AFSI) for CAMT purposes and reduce adjusted taxable income (ATI) under the IRC 163(j) business interest limitation when ATI is computed on an earnings-based measure. Model both interactions for corporate clients subject to CAMT or with significant business interest expense. See the Corporate Alternative Minimum Tax (CAMT) Practitioner Guide and the IRC 163(j) Business Interest Limitation Practitioner Guide for detailed analysis of these interactions.
• ADS exclusion check. If the property is of a type required to use ADS under IRC 168(g) (for example, property used predominantly outside the United States or certain listed property), it is not eligible for IRC 168(k). Confirm whether the same ADS exclusion applies under IRC 168(n) by checking Notice 2026-11, Notice 2026-16, and IRS.gov. Cite IRC 168(g).

Frequently Asked Questions

1. Q1: What is the difference between IRC 168(k) and IRC 168(n)?

   IRC 168(k) and IRC 168(n) are two separate and distinct provisions enacted or amended by OBBBA. IRC 168(k) bonus depreciation applies to "qualified property," which generally means personal property (machinery, equipment, certain software) and property with a MACRS recovery period of 20 years or less, as well as qualified improvement property. Buildings and structural components generally do not qualify for IRC 168(k) because they have recovery periods (39 years for nonresidential, 27.5 years for residential) that exceed the 20-year ceiling. IRC 168(n), created by OBBBA, fills this gap for manufacturing facilities by providing a new immediate expensing regime specifically for "qualified production property," which includes buildings and structural components used predominantly in manufacturing and production. A company building a new factory would use IRC 168(k) for its machinery and equipment and IRC 168(n) for the factory building itself. Hedge all specifics to IRC 168(n), IRC 168(k), Notice 2026-11, Notice 2026-16, and IRS.gov.

2. Q2: Is 100% bonus depreciation under IRC 168(k) permanent now?

   Under OBBBA, yes. The 100% bonus depreciation rate is permanently restored under IRC 168(k)(1)(A) as amended by OBBBA for qualified property placed in service after January 19, 2025. Under the prior TCJA trajectory, the rate was phasing down (80% in 2023, 60% in 2024, and continuing to phase down toward 0% by 2027). OBBBA eliminated that phase-down schedule and made 100% permanent (not merely a temporary extension at the pre-phase-down rate). Cite IRC 168(k)(1)(A) as amended by OBBBA. Hedge to IRS.gov for any subsequent modifications; confirm the current rate and any applicable limitations at IRS.gov before filing.

3. Q3: What is "qualified production property" under IRC 168(n) and what does the construction-start requirement mean?

   Qualified production property (QPP) under IRC 168(n) is a building or structural component used predominantly in manufacturing, production, or similar qualifying activities. OBBBA created this new category to allow immediate expensing of manufacturing buildings that are not eligible for standard IRC 168(k) bonus depreciation. The property's construction must begin after January 19, 2025 (the OBBBA enactment date), and the property must be placed in service before a deadline specified in IRC 168(n). The precise definition of QPP, the rules for determining when construction "begins," and the placed-in-service deadline are addressed in IRS Notice 2026-11 and Notice 2026-16. Practitioners must read both Notices in full before advising clients on any QPP project; proposed regulations are expected and may modify this guidance. Do not assume that safe harbors developed under other provisions (such as the physical work or 5% cost safe harbors from energy credit guidance) apply to IRC 168(n) without explicit Notice confirmation.

4. Q4: Does IRC 168(n) expensing create recapture risk on a later sale?

   Yes. Any depreciation or expensing deduction claimed under IRC 168(n) (or IRC 168(k)) is subject to IRC 1245 ordinary income recapture when the property is sold. If a manufacturer expenses a new factory building under IRC 168(n) in Year 1 and sells the building in Year 5, the entire amount previously expensed will be recaptured as ordinary income under IRC 1245(a)(1). This is a more adverse tax result than the 25% "unrecaptured Section 1250 gain" rate that would otherwise apply to a building depreciated on a straight-line basis. The specific mechanics of recapture for IRC 168(n) buildings should be confirmed under IRC 1245 and any applicable guidance in Notice 2026-11 or Notice 2026-16. This recapture risk is an important planning factor for clients who may sell the facility in the near to medium term.

5. Q5: Does California conform to IRC 168(k) and IRC 168(n)?

   No. California does not conform to either provision as modified by OBBBA. California's income tax conformity date is January 1, 2025, which predates the OBBBA enactment date of July 4, 2025. As a result, all OBBBA modifications (including the IRC 168(k) permanent 100% rate and the new IRC 168(n) QPP provision) are not adopted for California income tax purposes. California taxpayers must depreciate property under California's own rules (which generally do not include bonus depreciation), compute a California Schedule CA addback for any federal IRC 168(k) or IRC 168(n) deduction, and follow California's pre-OBBBA depreciation rules. Confirm the current California position at ftb.ca.gov and by reviewing California Revenue and Taxation Code; California can enact additional conformity legislation at any time.

6. Q6: How do I apply Section 179 alongside IRC 168(k) and IRC 168(n)?

   The Section 179 expensing election is applied first, before IRC 168(k) or IRC 168(n). A taxpayer elects Section 179 on qualifying property, which reduces the property's depreciable basis. Any remaining basis (after Section 179) is then eligible for IRC 168(k) bonus depreciation (if it is personal property eligible for IRC 168(k)) or IRC 168(n) immediate expensing (if it is QPP, subject to Section 179's applicability to real property; confirm IRC 179 eligibility for QPP buildings at IRS.gov). The Section 179 dollar limit and investment phase-out threshold are adjusted annually for inflation; confirm the current year limits at IRS.gov before advising clients. Note that Section 179 is generally not available for property used outside the U.S. and has other eligibility restrictions that differ from IRC 168(k) and IRC 168(n). The Section 179 deduction is also limited to the taxpayer's aggregate active business taxable income and cannot create or increase a net operating loss, unlike IRC 168(k) and IRC 168(n). Model both Section 179 and no-Section-179 scenarios to identify the optimal combination for each client.