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IRS Bonus Depreciation Guidance – The rules around bonus depreciation just changed — permanently. After years of watching a generous tax break slowly phase out, U.S. businesses now have clarity: 100% bonus depreciation is back, and this time it’s here to stay. The One Big Beautiful Bill Act (OBBBA), signed into law in July 2025, reversed the scheduled phase-down and restored the full first-year deduction for qualifying property acquired after January 19, 2025. Shortly after, the IRS issued Notice 2026-11 on January 14, 2026, providing interim guidance businesses can rely on right now. Whether you’re a manufacturer planning equipment purchases, a real estate investor considering a cost segregation study, or a small business owner trying to minimize your tax bill, understanding the current IRS bonus depreciation rules is essential to making smart capital decisions in 2025 and beyond.
What Is Bonus Depreciation?
Bonus depreciation — formally known as the additional first-year depreciation deduction under IRC § 168(k) — allows businesses to immediately write off the full cost of qualifying assets in the year they are placed in service. Instead of spreading deductions over an asset’s useful life under standard MACRS schedules, bonus depreciation accelerates those deductions to year one, reducing taxable income and improving cash flow.
The provision has been a cornerstone of business tax planning since its expanded form was introduced by the Tax Cuts and Jobs Act (TCJA) of 2017, and it just received a permanent, significant boost under new legislation.
The Big Change: 100% Bonus Depreciation Is Back — Permanently
For years, businesses watched the bonus depreciation rate decline on a legislated phase-down schedule. Under the TCJA, the deduction stood at 100% through 2022, then began declining by 20 percentage points each year:
| Tax Year | TCJA Bonus Depreciation Rate |
|---|---|
| 2022 | 100% |
| 2023 | 80% |
| 2024 | 60% |
| 2025 | 40% |
| 2026 | 20% |
| 2027+ | 0% |
That phase-down is now history for most assets. The One Big Beautiful Bill Act (OBBBA), passed in July 2025, permanently restored the 100% bonus depreciation rate for qualified property acquired and placed in service after January 19, 2025. This eliminates the scheduled elimination of the deduction that would have zeroed it out after 2026.
IRS Notice 2026-11: The Official Interim Guidance
On January 14, 2026, the IRS issued Notice 2026-11, providing interim guidance to implement the OBBBA’s changes to Section 168(k). Taxpayers can rely on this notice immediately, while formal proposed regulations are being developed.
The key message from the IRS: existing TCJA-era bonus depreciation regulations (Treas. Reg. §§ 1.168(k)-2 and 1.1502-68) remain largely applicable — businesses simply substitute updated dates and remove phase-down amounts. Specifically, taxpayers substitute “January 19, 2025” for “September 27, 2017” wherever those dates appear in the existing rules.
This approach gives businesses a reliable framework to plan purchases, model depreciation outcomes, and align capital spending with more predictable tax treatment — without waiting for final regulations.
What Property Qualifies for 100% Bonus Depreciation?
To be eligible for the additional first-year deduction under the OBBBA and Notice 2026-11, property generally must:
- Be tangible depreciable property under the Modified Accelerated Cost Recovery System (MACRS)
- Have a recovery period of 20 years or less — this covers most standard equipment, machinery, vehicles, computers, and furniture
- Be acquired and placed in service after January 19, 2025
- Meet original use or used property acquisition requirements — both new property (where original use begins with the taxpayer) and qualifying used property are eligible
The OBBBA also expanded eligible categories to include qualified sound recording productions, a new addition relevant to media, entertainment, and advertising companies.
Real Estate Investors: Don’t Overlook Cost Segregation
While real property itself generally does not qualify (buildings have recovery periods exceeding 20 years), components of real property identified through a cost segregation study often do. A professional cost segregation study typically identifies a significant portion of a building’s purchase price as qualifying components — such as appliances, cabinetry, lighting fixtures, and land improvements — that carry shorter MACRS recovery periods and qualify for bonus depreciation.
The Critical Date: January 19, 2025
The acquisition date is the determining factor for which bonus depreciation rate applies, and the IRS examines binding contract dates, not closing dates, when making this determination.
- Property acquired before January 20, 2025 (i.e., under a written binding contract signed before that date) remains subject to the TCJA phase-down rates — 40% for most property placed in service in 2025.
- Property acquired on or after January 20, 2025 qualifies for the permanent 100% rate under the OBBBA.
For a contract to be considered “binding” for bonus depreciation purposes under Notice 2026-11 (consistent with TCJA regulations), it must:
- Be legally enforceable under state law
- Include a cancellation penalty of at least 5% of the total contract price
- Meet applicable IRS criteria
If the cancellation penalty is less than 5%, the IRS does not consider the contract binding, and the acquisition date defaults to the closing date.
Self-Constructed Property
For property a taxpayer builds or constructs itself, the acquisition date is determined by when physical work of a significant nature begins, or when the taxpayer incurs at least 10% of the total expected cost (using the safe harbor). Planning or design activities alone do not count.
Available Elections Under Notice 2026-11
Businesses are not locked into taking the full 100% deduction. Notice 2026-11 preserves several flexible elections:
1. Reduced Rate Election (Transition Year)
For the first taxable year ending after January 19, 2025, businesses may elect to apply the pre-OBBBA reduced rate rather than 100%. This means:
- 40% bonus depreciation for most qualified property (or 60% for long-production-period property and certain aircraft)
- 40% for specified plants planted or grafted during the transition tax year
This election must be made by attaching a statement to a timely filed federal tax return (including extensions) for the taxable year that includes January 20, 2025. Once made, the election cannot be revoked without IRS consent, and it applies to entire classes of property, not individual assets.
2. Opting Out Entirely
Under Section 168(k)(7), a taxpayer can elect out of bonus depreciation for any entire class of qualified property placed in service during the tax year. This election is typically irrevocable. For qualified sound recording productions, a taxpayer can make this election at the individual production level.
3. Component Election
Notice 2026-11 confirms that taxpayers may elect to treat components of larger self-constructed property as acquired separately, meaning some components could qualify for 100% bonus even if the larger project does not. However, the IRS cautions that the regulations do not specify what constitutes a “component” or at what level to apply the rules. Taxpayers should proceed carefully and consult a tax professional before making this election.
Farming Businesses: Special Provisions for Specified Plants
The OBBBA includes specific rules for farming businesses. Taxpayers who make the Section 168(k)(5) election can claim 100% bonus depreciation on specified plants (trees, vines, and similar) planted or grafted after January 19, 2025. The transition-year 40% election is also available for plants planted or grafted during the first tax year ending after January 19, 2025. Procedures follow the rules set forth in Treas. Reg. § 1.168(k)-2(f).
How to Claim Bonus Depreciation: Form 4562
Bonus depreciation is reported on IRS Form 4562, “Depreciation and Amortization.” Elections to opt out or take a reduced rate must be filed as a statement attached to Form 4562 by the due date of the federal return, including extensions.
State Tax Conformity: An Important Caution
Federal law and state law do not always move in lockstep. Many states, including Virginia, have not yet conformed to the updated federal bonus depreciation provisions under the OBBBA. This means state tax liability could differ significantly from federal tax liability for the same asset.
Businesses operating in multiple states or those with significant capital investment activity should consult a tax advisor and consider filing an extension while waiting for state-level guidance to be issued. The state conformity landscape will continue to evolve through 2026.
Strategic Tax Planning Considerations
The permanent restoration of 100% bonus depreciation creates planning opportunities and some important tradeoffs:
Accelerating deductions improves current-year cash flow — especially valuable for capital-intensive industries, manufacturers, and real estate investors. However, claiming large deductions in the current year reduces the depreciable basis available in future years, which can matter if tax rates rise or if income shifts to higher brackets later.
Coordinate with other incentives. Bonus depreciation pairs well with the Section 179 expensing deduction and, for commercial real estate, the Section 179D Energy-Efficient Commercial Buildings Deduction.
Consider the timing of income. If current-year income is unusually high, taking the full 100% deduction may produce greater tax savings than in a lower-income year. If income is already low (or if a business anticipates future profitability), spreading deductions via a reduced-rate election may be more advantageous.
Plan acquisitions carefully. The January 19, 2025 cutoff is firm. Businesses should review contracts, closing timelines, and self-construction start dates carefully to confirm which rate applies.
Key Takeaways
- 100% bonus depreciation is now permanent under the OBBBA for qualifying property acquired after January 19, 2025.
- IRS Notice 2026-11 (issued January 14, 2026) provides interim guidance and confirms that existing TCJA regulations apply with updated dates.
- Binding contract date — not closing date — determines which rate applies; contracts must include a 5%+ cancellation penalty to be considered binding.
- Transition-year elections allow businesses in the first tax year ending after January 19, 2025, to claim 40% (or 60% for long-production-period property) instead of 100%.
- State conformity is unresolved in many states; businesses should verify their state’s position before finalizing returns.
- Formal proposed regulations are forthcoming from the IRS; until then, Notice 2026-11 is the operative guidance.
Frequently Asked Questions
Does bonus depreciation apply to used property? Yes. As expanded by the TCJA and preserved under the OBBBA, qualifying used property is eligible for bonus depreciation if it meets the five-part used property acquisition requirements, including that the taxpayer has not previously used the property and did not acquire it from a related party.
Can I take bonus depreciation on real estate? Directly on a building, generally no — residential rental property has a 27.5-year recovery period and commercial property 39 years, both exceeding the 20-year threshold. However, components identified via cost segregation can qualify.
What if I don’t want to take the full deduction? You have options. You can elect a reduced rate (40%) for the transition year, or elect out entirely for a given class of property. Both elections are made on Form 4562 with a timely filed return.
When will final regulations be issued? The IRS has announced plans to issue proposed regulations consistent with Notice 2026-11. No specific timeline has been given; businesses may rely on the interim guidance until final rules are in place.
This article is for informational purposes only and does not constitute legal or tax advice. Consult a qualified tax professional for guidance specific to your situation. Sources: IRS Notice 2026-11; BDO Tax Alert (Feb. 2026); RSM US Tax Alert (Jan. 2026); Forvis Mazars (Feb. 2026); Center for Agricultural Law and Taxation, Iowa State University (Jan. 2026).