Tax-exempt status does not mean tax-invisible. If your organization operates a for-profit subsidiary, conducts manufacturing or production activities that generate unrelated business taxable income (UBTI), or holds taxable assets through a related entity, the One Big Beautiful Bill Act (OBBBA) introduced a provision that may materially reduce your tax liability — provided you understand how it applies, when it applies, and what the IRS currently expects from taxpayers claiming it.
On February 20, 2026, the Department of the Treasury and the Internal Revenue Service issued Notice 2026-16, providing interim guidance on the special depreciation allowance for Qualified Production Property (QPP). Taxpayers may rely on this interim guidance until proposed regulations are issued. This article explains what QPP is, how it applies to nonprofit-affiliated taxable operations, and what planning steps to take now.
Key Takeaways
- The OBBBA created a new 100% first-year depreciation allowance for Qualified Production Property — nonresidential real property used as an integral part of a qualified production activity, including manufacturing, chemical production, agricultural production, and refining.
- QPP expensing is an elective provision. The election must be made on a timely-filed federal tax return for the year in which the property is placed in service, and Notice 2026-16 provides interim rules for making that election.
- To qualify, construction must begin after January 19, 2025, and before January 1, 2029. The property must be placed in service after July 4, 2025, and before January 1, 2031.
- For nonprofits, QPP expensing is only relevant to the extent the organization — or a related taxable entity — has taxable income against which the deduction can be applied. It cannot be used to offset exempt activity income.
- Bottom Line: Nonprofits investing in production facilities through taxable subsidiaries or UBIT-generating operations should evaluate QPP eligibility now, before finalizing construction commitments, to determine whether this provision changes the economics of planned capital projects.
What Is Qualified Production Property?
Under the OBBBA, Qualified Production Property is defined as nonresidential real property — meaning commercial or industrial buildings and structural components — that a taxpayer uses as an integral part of a qualified production activity.
A qualified production activity, as defined in Notice 2026-16, is a manufacturing, chemical production, agricultural production, or refining activity that results in the substantial transformation of property comprising a qualified product. This is a specific, defined standard. Warehousing, distribution, retail, administrative office functions, and research and development activities do not constitute qualified production activities for this purpose, and portions of a facility used for those functions do not qualify as QPP even if the remainder of the building does.
For a nonprofit organization evaluating this provision, the first question is whether any of its operations—or those of a for-profit subsidiary—fall within this definition. Agricultural production cooperatives, food manufacturing affiliates, facilities producing goods sold through a related taxable entity, and similar structures may qualify. Organizations that are uncertain should document the activity in detail and obtain a determination before construction begins, not after.
How QPP Applies to Nonprofit-Affiliated Taxable Entities
A 501(c)(3) organization that directly conducts a qualified production activity as part of its exempt purpose — a nonprofit agricultural producer, for example — would not pay corporate income tax on income from that exempt activity. QPP expensing, as a tax deduction, would have no value applied against income that is already exempt.
The provision becomes relevant in two scenarios.
The first is a for-profit C corporation subsidiary of a nonprofit. If the parent 501(c)(3) owns a C corporation subsidiary that conducts manufacturing, chemical production, agricultural production, or refining, and that subsidiary is placing qualifying production facilities in service, the subsidiary may claim the QPP deduction against its own taxable income. The deduction belongs to the taxable entity, not the tax-exempt parent. The parent does not benefit directly, but the subsidiary’s reduced tax liability affects after-tax cash flows that may ultimately support the mission through dividends or other distributions.
The second scenario is a nonprofit conducting a production activity that is not substantially related to its exempt purpose — making that activity subject to UBIT under IRC Section 511. In this case, the organization is filing Form 990-T and paying UBTI tax at the federal corporate rate of 21%. If the organization places qualifying production facilities in service in connection with that UBIT-generating activity, the QPP deduction may reduce UBTI, directly reducing the organization’s tax liability on Form 990-T. The deduction is limited to the extent of UBTI — it cannot offset exempt activity income or create a UBTI loss that eliminates tax on other unrelated business activities, because IRC Section 512(a)(6) requires UBIT to be calculated separately for each unrelated trade or business.
The Timing Requirements Are Not Flexible
Notice 2026-16 confirms the statutory timing requirements established by the OBBBA, and they are precise:
Construction of the qualifying production facility must begin after January 19, 2025, and before January 1, 2029. Property that was already under construction — meaning a written binding contract had been entered into before January 20, 2025 — does not qualify for the QPP special depreciation allowance.
The property must be placed in service after July 4, 2025 (the date the OBBBA was signed into law), and before January 1, 2031.
The election to treat property as QPP must be made on a timely filed federal tax return — including extensions — for the taxable year in which the property is placed in service. Notice 2026-16 provides interim rules on the form and manner of this election pending the issuance of proposed regulations. Organizations should not assume the election is automatic. It requires an affirmative act on the tax return, and failing to make it timely generally means it cannot be made retroactively.
Recapture: The Provision That Bites If You’re Not Careful
QPP expensing is not unconditional. If property that has been treated as QPP ceases to qualify — because the taxpayer changes the use of the facility, disposes of it, or otherwise removes it from qualified production activity — depreciation recapture rules apply. Notice 2026-16 explains how these recapture rules operate.
In practical terms, this means that a nonprofit subsidiary that builds a production facility, claims 100% first-year expensing under QPP, and then converts the facility to office use or sells it within the applicable recapture period will recognize income — potentially substantial income — in the year of the disqualifying event. Capital expenditure and operational planning decisions made in the years following the QPP election need to account for this risk.
What Nonprofit Finance Leaders Should Do Now
Organizations with for-profit subsidiaries or UBIT-generating production operations should take three concrete steps before proceeding with any capital project that might qualify under QPP.
First, determine whether the planned activity meets the definition of a qualified production activity under Notice 2026-16. This is a factual and legal analysis, not a self-assessment. The interim guidance provides definitions that are more specific than the statutory text alone, and the IRS has requested public comments on areas where additional guidance is needed, which signals that this is a developing area with interpretive complexity.
Second, document construction commencement. The January 19, 2025, start-date cutoff is a hard line. Organizations that began planning a facility before that date must confirm that no written, binding contract existed prior to January 20, 2025. Construction start date documentation — permits, contracts, site preparation records — should be preserved in anticipation of potential examination.
Third, model the tax impact at the entity level. QPP expensing reduces the entity that owns the property’s taxable income. For a C corporation subsidiary, that means modeling the subsidiary’s projected taxable income for the year of placement in service and confirming that the deduction produces an actual tax benefit rather than creating a loss that must be carried forward. For a nonprofit filing Form 990-T, the analysis requires projecting UBTI by activity and confirming that the QPP deduction can be applied against UBTI from the same production activity.
QPP Provision
The QPP provision is a material tax incentive for organizations building production facilities through taxable entities. For nonprofits, it occupies a narrow but real space: for-profit subsidiaries and UBIT-generating production operations that meet the statutory definition and satisfy the timing requirements. The provision is elective, time-limited, subject to recapture, and currently operating under interim guidance while proposed regulations are developed.
Organizations considering capital investment in production facilities should not assume this planning opportunity will wait. Construction must begin before January 1, 2029, and proposed regulations may refine — or tighten — the definitions in Notice 2026-16 before that deadline arrives.
Wiss’s nonprofit tax advisory team advises tax-exempt organizations on UBIT planning, for-profit subsidiary structures, and the application of new tax legislation to complex organizational structures. If your organization is evaluating a capital project that may qualify under the QPP provisions, contact our team before breaking ground.
This article reflects the provisions of the OBBBA and interim guidance in IRS Notice 2026-16, issued February 20, 2026. Taxpayers may rely on Notice 2026-16 until proposed regulations are issued. This article is general in nature and does not constitute tax advice for any specific situation. Consult your Wiss advisor regarding your organization’s particular circumstances.
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