The IRS released Notice 2026-11, which explains how taxpayers can use the permanent 100% bonus depreciation deduction starting on January 19th, 2025. The One Big Beautiful Bill Act (OBBBA) restored 100% bonus depreciation under Section 168(k). Under this law, property with a class life of less than 20 years that is acquired and placed in service after January 19, 2025, can be fully expensed.
While the restoration of 100% bonus was widely welcomed, this guidance is important for real estate investors and businesses planning large capital investments.
The Notice largely mirrors guidance issued after the Tax Cuts and Jobs Act, with updated dates. While it does not introduce new concepts, it highlights several points taxpayers should review carefully.
Acquisition and Placed Into Service Dates
The Notice confirmed the definition of acquisition date for eligible property, specifically with binding contracts. To be eligible for 100% bonus depreciation, qualified property must be acquired and placed into service after January 19th, 2025. Acquisition date and placed into service date are not always the same and should be considered carefully, especially for taxpayers who were acquiring property around the cutoff date. In the notice, it defines the acquisition date as the date a binding contract is entered. To be considered a binding contract must be enforceable under state law and does not limit damages to a specified amount.
For taxpayers who entered a binding contract prior to January 19th, 2025, the acquisition date is before the cutoff date and will be only eligible for 40% bonus depreciation in 2025 for the property.
Example:
A real estate investor signs a binding purchase agreement on January 2, 2025, and closes on January 30, 2025. The acquisition date is January 2. As a result, the property falls under prior law and qualifies for 40% bonus depreciation, not 100%.
Taxpayers who acquired property around the cutoff date should review contracts closely.
Elections Remain Available
While most taxpayers will take advantage of 100% bonus depreciation, it may not always be the best answer for a taxpayer.
Section 168(k)(7) remains in effect and allows taxpayers to elect out of bonus depreciation by asset class. Once made, this election is generally irrevocable. Taxpayers should consider current and future tax positions before electing out.
Additionally, Section 168(k)(10), is also still available. For investors who may not have a need to utilize 100% bonus depreciation, there is an option available for taxpayers to elect into using 40% bonus depreciation.
Component Election for Constructed Property
The Notice confirms that the component election under Treasury Regulation §1.168(k)-2(c) remains available for self-constructed property. This is based on an analysis to determine when construction is started.
There is a 10% safe harbor test in the regulations that states construction is considered to begin construction when physical work of a significant nature begins. Typically, people look at the safe harbor test, which states if 10% or more of the total construction cost has been incurred or paid, then construction has begun. This calculation does not include land cost and pre-construction costs such as design, permitting, and other similar costs.
If a taxpayer began construction before January 19, 2025, and incurred more than 10% of the total project cost, the property is generally treated as acquired before the cutoff date and limited to 40% bonus depreciation.
The component election allows taxpayers to treat certain parts of the project separately. Components that began construction after January 19, 2025, may qualify for 100% bonus depreciation, even if the overall project does not.
A written statement must be attached to a timely filed tax return, including extensions and state:
- That the taxpayer is making the election in § 1.168(k)-2(c), and
- Whether the taxpayer is making the election for all or some of the components described in § 1.168(k)-2(c)(3).
Example:
If carpeting or qualified cabinetry had not begun construction as of January 19, 2025, those components may qualify for 100% bonus depreciation. If a parking lot was already 15% complete by that date, the parking lot assets would remain limited to 40% bonus depreciation.
This election is especially important for developers and taxpayers with long construction timelines.
Final Thoughts
Notice 2026-11 provides useful clarity, especially for taxpayers acquiring or constructing property around the January 19, 2025, cutoff. Cost segregation can play a key role in applying this guidance correctly.
Taxpayers who are constructing assets may miss significant deductions if they do not evaluate component-level opportunities.
If you are considering a cost segregation study, Align Tax Consulting can help assess whether it makes sense for your situation and how to apply the guidance accurately.
