Illustrative Manufacturing Facility
A hypothetical plant used to show process electrical versus building electrical, and to flag — without claiming — the §168(n) window. Educational information, not tax advice.
Educational information, not tax advice.
Updated 2026-10-14
Assumptions
- Educational information, not tax advice.
- No conclusion is reached on whether the building is qualified production property.
- Section 168(n) is described only as an election to discuss with a CPA. This illustration does not elect it or compute it.
- Assume a metal-fabrication shop with a two-story office on the same site. Offices and parking are excluded uses under Notice 2026-16.
- Any dollar figures below are invented for arithmetic only. They are not a typical mix and not a client result.
Key takeaways
- Process utilities can be personal property with an activity class life when the facts and load evidence support it.
- Offices and parking on the same site are excluded from §168(n). Do not treat the whole campus as production space.
- Scott Paper supplies the electrical method, not a percentage. The ATG limits IRS-accepted functional allocation to primary and secondary electrical distribution.
- Cost segregation classifies components. Section 168(n) is a separate elective allowance. They are not the same computation.
A metal-fabrication plant is built with a shop and a two-story office. The study splits process compressed air, weld power, and equipment catwalks from the office HVAC and restrooms. Suppose, for arithmetic only, capitalized cost of $15 million with $2 million assigned to land. Invented depreciable basis is $13 million. No process-share percentage is claimed.
If construction began after January 19, 2025, the owner’s CPA might also ask whether the shop portion is qualified production property under §168(n). This illustration does not elect that allowance or compute it. Notice 2026-16 excludes office, parking, and sales space.
Two analyses can be relevant in the same year. First, MACRS classification of machinery and dedicated process utilities versus the building. Second, whether a portion of the nonresidential building is QPP. They can both be on the CPA’s checklist; they are not the same schedule line.
Two analyses
Cost segregation classifies components. Section 168(n) is a separate elective allowance for a qualifying building portion. They can both be relevant; they are not the same computation. Notice 2026-16 describes manufacturing, chemical production, agricultural production, and refining as qualified production activities, with construction and placed-in-service windows and change-of-use recapture. Construction generally must begin after January 19, 2025 and before 2029, and the property must be placed in service after July 4, 2025 and before 2031 — as described in that notice. Dates and eligibility are CPA questions. This page reaches no eligibility conclusion for any reader.
Offices, parking, sales, lodging, research, and engineering space are excluded uses. A two-story office attached to the shop is not converted into QPP by adjacency. Recapture can apply if use changes. Discuss the election with a CPA; do not treat this illustration as a decision.
Process versus building — electrical
Scott Paper Co. v. Commissioner allocated mill electrical systems by function. AOD 1991-019 and the ATG reflect that the IRS will not challenge functional allocation for primary and secondary electrical distribution when supported. The §1245 share needs design-load (demand-load) evidence, not a round percentage. Welders, plasma tables, and compressed-air compressors are the process loads in this illustration; office lighting and restroom exhaust are building loads.
Do not extend that electrical method to compressed-air piping or process plumbing as an IRS-accepted functional allocation. Dedicated process lines can still be personal property on their own facts and, in industry matrices, their own rows. Document them separately.
Industry matrices and catwalks
The audit guide includes pharmaceutical/biotech and auto-manufacturing matrices. Process chilled water, special foundations, and equipment catwalks are personal property in those tables; building chilled water and building mezzanines are not. This fabrication shop is not an auto plant. Use those rows only by analogy where the function matches, and say so.
Equipment-access catwalks that exist to serve machines can follow the activity class. Building mezzanines that are floor area stay with the building. Specially designed foundations can follow equipment; extra slab thickness is not enough, per the pharmaceutical matrix caution.
Activity class, not 5-year-by-default
Machinery recovery periods often come from the activity class in Publication 946 Appendix B (Rev. Proc. 87-56 classes), not from a habit of labeling everything 5-year. Rev. Rul. 2003-81 distinguishes asset category from activity category. A lessor generally uses the lessee’s activity. This illustration does not pick a class number without that table in front of the reviewer.
Office furniture in the two-story office is a familiar class 00.11, 7-year item. That does not pull the office structure out of 39-year property.
Records, inspection, and filing
New construction should use actual cost records: equipment purchase orders, process-piping contracts, electrical pay-application splits, and change orders. Inspect the shop versus office, photograph equipment pads and catwalks, and interview the plant engineer about what the compressed-air system serves. Reconcile to the invented $13 million, excluding land, without double-counting capitalized equipment invoices.
The CPA files Form 4562 for MACRS classes and, separately, decides whether to elect §168(n) on a qualifying portion. Recapture on a later change of use is part of that CPA discussion. CostSeg SI does not claim operational Extraction, RSMeans, QA, or engineer-certification agents. If process electrical was unbundled from a Division 26 lump sum, write the split method down so it can be reversed. Educational information, not tax advice.
Sources
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- 3IRS Publication 5653 — Cost Segregation Audit Techniques Guide (rev. 2-2025)(opens in a new tab)
Written for IRS examiners. The guide states it is not an official pronouncement of law and cannot be cited as authority. It predates the July 2025 law.
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- 6IRS Publication 946 — How To Depreciate Property (2025)(opens in a new tab)
Appendix B reproduces the Rev. Proc. 87-56 class lives.
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