At a Glance
The IRS has issued interim guidance (Notice 2026-11) explaining how the One Big Beautiful Bill Act affects first-year depreciation deductions, with a particular focus on determining when property is placed in service and which bonus depreciation percentage applies. The guidance is critical for businesses making capital investments in 2025 and beyond, as it clarifies available elections during the transition to permanent 100% bonus depreciation and highlights how timing decisions can significantly affect tax outcomes and cash flow.
Contents
- Bonus Depreciation Under the OBBBA
- What the Interim Guidance Covers
- Determining Eligible Property
- Transitional Election Options
- Looking Ahead
- ARB Insights
Bonus Depreciation Under the OBBBA
The OBBBA permanently restores 100% bonus depreciation for qualified property acquired and placed in service after January 19, 2025. This change reestablishes full first-year expensing as a long-term feature of the tax code and reverses the scheduled phase-down that had been underway. While the restoration is broadly favorable, the law’s mid-year effective date raised questions about how the rules apply to property placed in service during the transition period.
To address that uncertainty, the IRS issued Notice 2026-11 to explain how taxpayers should apply the new law while formal regulations are being developed. The guidance is intended to promote consistent application of the OBBBA by clarifying which bonus depreciation percentage applies to a given asset and what elections are available, particularly where timing issues could materially affect depreciation outcomes.
What the Interim Guidance Covers
Notice 2026-11 allows taxpayers to rely on existing bonus depreciation rules under Section 168(k), with targeted modifications reflecting the OBBBA’s effective dates and new elections. Taxpayers may rely on the interim guidance for property placed in service before final regulations are issued, provided the guidance is applied consistently and in its entirety to all eligible property beginning with the first year of reliance. Rather than introducing an entirely new framework, the IRS largely carried forward familiar concepts, easing implementation while still requiring careful analysis.
The guidance focuses heavily on when property is considered placed in service, because that determination governs whether an asset qualifies for 100% bonus depreciation, a reduced transitional percentage, or standard depreciation treatment. In general, property is placed in service when it is ready and available for its intended use. Although this definition is well established, applying it can be challenging for assets involving construction, installation, testing, or phased deployment.
Importantly, while prior placed-in-service deadline restrictions no longer apply to property acquired after January 19, 2025, the placed-in-service date remains critical for determining the applicable bonus percentage and available elections. As a result, timing has taken on heightened importance. In some cases, a difference of days—or even hours—can affect the amount of depreciation available in the first year.
Determining Eligible Property
To qualify for bonus depreciation under Section 168(k), property must meet several requirements, including:
- Qualified property, generally tangible depreciable property with a MACRS recovery period of 20 years or less, certain computer software, water utility property, qualified film or theatrical productions, and qualified sound recording productions
- Acquired after January 19, 2025, and placed in service after that date
- Eligible used property, provided it meets the applicable acquisition requirements, including that the property was not previously used by the taxpayer and was not acquired
The guidance also addresses qualified sound recording productions, which were explicitly added as bonus-eligible property under the OBBBA. For these assets, acquisition occurs when principal recording commences, and placement in service occurs upon initial release or broadcast. To qualify, recording must begin in a tax year ending after July 4, 2025.
Transitional Election Options
Recognizing that full expensing may not be optimal for all taxpayers, the guidance outlines several elections available for the first tax year ending after January 19, 2025. It is important to note that property placed in service between January 1, 2025 and January 19, 2025 remains subject to the pre-OBBBA phase-down rules and generally qualifies for 40% bonus depreciation (60% for certain long-production-period property or qualifying aircraft).
100% Bonus Depreciation (Permanent Rule) — For most qualified property acquired and placed in service after January 19, 2025, the default rule is 100% bonus depreciation, allowing the full cost to be deducted in the year placed in service.
Reduced Percentage Election — For property placed in service during the first taxable year ending after January 19, 2025, taxpayers may elect a reduced first-year deduction instead of 100%. This generally allows:
- 40% bonus depreciation for most qualified property, or
- 60% bonus depreciation for certain property with longer production periods or qualifying aircraft
This election may be useful for managing taxable income, preserving deductions for future years, or mitigating the impact of accelerated depreciation on other tax attributes.
Electing Out of Bonus Depreciation — Taxpayers may also elect out of bonus depreciation entirely for a class of property, reverting to standard MACRS depreciation. This election generally applies to all property in the same class placed in service during the year.
Specified Plants and Farming Elections — Farming businesses may elect to claim bonus depreciation for specified plants, such as fruit trees or vines, in the year they are planted or grafted rather than waiting until placement in service.
Looking Ahead
While the OBBBA’s restoration of 100% bonus depreciation is broadly favorable, the IRS guidance underscores that planning and timing remain essential. Taxpayers should carefully evaluate:
- Whether to claim full bonus depreciation or elect a reduced rate
- How depreciation elections align with broader tax planning goals, including net operating losses and credits
- How placed-in-service timing interacts with MACRS conventions, including the mid-quarter convention
State conformity issues may further complicate the analysis, as federal depreciation benefits do not always translate directly to state tax savings.
Given the technical nature of these rules and the potential impact on cash flow and compliance, businesses should consult with a qualified tax advisor to ensure the new guidance is applied correctly and depreciation strategies are aligned with overall tax objectives.
ARB Insights
For additional context on depreciation rules and the broader implications of the One Big Beautiful Bill Act, you may find these ARB articles helpful:
- Depreciation Made Simple: Bonus, Section 179, MACRS, and Straight-Line Explained
- State Conformity to OBBBA Tax Provisions: What Businesses and Taxpayers in Maine, Massachusetts, and New Hampshire Need to Know
- Massachusetts Proposes Legislation to Delay OBBBA Conformity: What It Means for Businesses and Taxpayers
Nick Lagoditz is a Tax Manager with ARB who provides tax services to construction, manufacturing, and ESOP-owned entities. Working closely with clients, he helps to improve their financial reporting and support their business goals.
