TXCPA Comment Letter on Section 168(n) QPP Guidance: 6 Unresolved Issues Taxpayers Can’t Ignore

Article

May 20, 2026

On May 8, 2026, the Federal Tax Policy Committee of the Texas Society of Certified Public Accountants (TXCPA) submitted a comment letter to Treasury Secretary Scott Bessent regarding Notice 2026-16 (the Notice), the interim guidance on the new 100% special depreciation allowance for Qualified Production Property (QPP) under Section 168(n). The letter identifies six areas where additional clarity is needed before proposed regulations are finalized.

1. Defining “Integral Part” of a Qualified Production Activity

TXCPA notes that the Notice’s treatment of mixed-use facilities creates ambiguity for businesses such as restaurants that also package and distribute products for retail sale elsewhere. The letter recommends that proposed regulations adopt the concept of a “production portion of the facility” and permit reasonable allocation between qualifying and non-qualifying costs. The Notice does allow taxpayers to rely on a 95% de minimis rule, but additional clarity on partial-use scenarios would benefit a wide range of taxpayers.

2. Cost Identification and Allocation

The Notice permits “any reasonable method” for allocating basis but provides no examples or minimum documentation standards. The TXCPA requests that proposed regulations include illustrative examples to reduce uncertainty on examination.

3. Start of Construction and Placed-in-Service Issues

The TXCPA requests clarification of what constitutes the “start of construction,” particularly for phased projects. The physical work test and 10% safe harbor from the Section 168(k) regulations are referenced in the Notice, but the interaction of the QPP timing windows (construction commencing before January 1, 2029; placed in service before January 1, 2031) with multi-year projects remain unresolved.

4. Expansions, Rehabilitations and Improvements

The letter asks whether partial improvements to an existing facility can qualify even when the underlying structure does not. This is relevant for manufacturers adding production lines, expanding processing capacity, or converting warehouse space to active manufacturing use.

5. Recapture Rules During the 10-year Period

The TXCPA identifies two scenarios where the 10-year recapture framework may produce inequitable results: bankruptcy, where liquidation may take years and generate “phantom” income with no corresponding economic gain, and involuntary conversion, where a disaster compounds the taxpayer’s financial burden. The letter recommends explicit regulatory exclusions for both.

6. Election Revocation Standard

The Notice requires a private letter ruling and a showing of “extraordinary circumstances” to revoke a Section 168(n) election, with a presumption that hindsight disqualifies the request. The TXCPA characterizes this standard as unduly restrictive and notes it may discourage taxpayers from electing in borderline cases.

Analysis of the TXCPA Comment Letter

Integral Part and Cost Allocation (Issues 1 and 2)

From a practitioner perspective, the concerns raised in the comment letter are well-founded and likely extend beyond the examples cited. The ambiguity around what constitutes an “integral part” appears relevant not only to foodservice operations, but also to industries such as breweries, pharmaceutical compounders, and contract manufacturers operating in facilities with shared production and warehousing space.

To improve administrability and consistency, Treasury could consider confirming that a detailed cost segregation study constitutes sufficient documentation for allocating production versus non-production use. Establishing a hierarchy of acceptable allocation methodologies — potentially positioning cost segregation as a preferred approach for real property — could further reduce uncertainty and audit risk.

Start of Construction and Improvements (Issues 3 and 4)

The comment letter appropriately identifies phased construction and partial improvements as two of the most significant unresolved eligibility questions under current guidance. Additional clarification would be helpful on whether each phase of a project may be treated as a separate property for purposes of the placed-in-service and beginning-of-construction requirements, as well as whether a continuous construction safe harbor will be adopted. With respect to improvements, there is a reasonable argument that an identifiable improvement could qualify independently if it satisfies the “integral part” standard, even where the underlying structure was placed in service prior to the effective date of the QPP regime.

Recapture (Issue 5)

The recommendation to exclude involuntary conversions under Section 1033 from recapture aligns with broader principles in the code and appears consistent with existing policy frameworks. The comment letter’s position on bankruptcy also raises valid considerations; however, any relief in this area may warrant a more targeted approach. Limiting exceptions to situations where cessation of qualifying use is directly attributable to bankruptcy proceedings could help preserve the integrity of the rule while avoiding unintended planning opportunities.

Election Revocation (Issue 6)

The comment letter highlights an important tension between administrative control and practical flexibility. While Treasury has a legitimate interest in preventing post hoc election changes, the current standard may be overly restrictive given the complexity and novelty of Section 168(n). A limited correction window — such as 12 to 18 months following the filing of the return — could allow taxpayers to revoke an election via amended return without requiring a private letter ruling. Outside of such a window, retaining an “extraordinary circumstances” standard would continue to provide appropriate guardrails.

Your Guide Forward

Cherry Bekaert’s Tax Credits & Incentives Advisory team continues to monitor developments in the QPP space and is prepared to assist clients with evaluating eligibility, coordinating cost segregation studies with QPP elections, modeling depreciation benefits and recapture exposure, and navigating the evolving regulatory landscape. If you have questions about how Notice 2026-16 or the TXCPA comment letter may affect your organization, please contact our tax advisors.

Connect With Us