What Businesses Should Know About the New 100% Bonus Depreciation Rules

The One Big Beautiful Bill (OBBB) (P.L. 119-21) enacted in 2025 included significant amendments to the bonus depreciation rules under Section 168(k).  It permanently reinstated bonus depreciation at 100% of the cost of eligible property, while modifying eligibility criteria and timing rules that apply to when property is acquired and placed in service. The OBBB also created a new depreciation deduction under Section 168(n) for Qualified Production Property (QPP) which allows taxpayers a temporary special depreciation allowance equal to 100% of the adjusted basis of the QPP.

On January 14, 2026, the Department of Treasury (Treasury) and the Internal Revenue Service (IRS) issued Notice 2026-11 which provides taxpayers with interim guidance on  the permanent 100% additional first year depreciation deduction for eligible depreciable property acquired after January 19, 2025, provided for in the OBBB. The Notice states that Treasury and the IRS intend to issue proposed regulations that would implement the additional first year depreciation deduction under Section 168(k,) and that the forthcoming proposed regulations are expected to be consistent with the interim guidance in the Notice.

On February 20, 2026, Treasury and the IRS issued Notice 2026-16, which provides interim guidance under Section 168(n) for taxpayers claiming bonus depreciation for the construction/expansion of qualified production property (QPP) (i.e., property used in domestic manufacturing, production, or refining operations) for QPP placed in service after July 4, 2025, through 2030. Prior to the OBBB, nonresidential real property generally was depreciated over 39 years using the straight-line method. The OBBB changed that framework for a defined class of production facilities by allowing taxpayers to elect to expense up to the full depreciable basis of qualifying property in the year in which it is placed in service. Because this is a new depreciation deduction without any established guidelines to use, this interim guidance will help to provide taxpayers with some operating rules, while they wait for proposed regulations. Some definitions and rules are taken from current provisions in Sections 167 and 168 which is helpful; however, questions remain to be answered in the forthcoming regulations.

This Tax Alert explains the mechanics of bonus depreciation as modified by OBBB and highlights the key acquisition and placed-in-service requirements that determine eligibility.  It also details the guidance provided for in Notice 2026-11 and Notice 2026-16.

What Actions Should Taxpayers Take?

• Monitor regulatory developments in 2026.
• Ensure that you understand the current rules in the statute and the guidance in Notice 2026-11 and Notice 2026-16, including the effective dates and the reliance rules.
• Make sure that you comply with all the rules that are currently in place for the assets you intend to file claims for including all rules in all applicable guidance that has been issued when you file your tax return.
• Maintain good records and documentation including substantiation of asset valuations, business use, acquisition dates, and placed-in-service milestones.
• Implement internal tracking systems to monitor issues related to recapture rules, limitations on QPP, and business use substantiation.
• Be prepared to evaluate recapture implications if changes in use are anticipated.
• Consider whether to take advantage of any of the elections available including the Transition Choice election, the Component Election, or the Opt-Out election.
• Under the Transition election, consider whether it is better to elect a 40% deduction instead of the full 100% if it better suits the taxpayer’s tax case.
• Consider whether taking bonus depreciation is the best course or whether opting out of the 100% bonus depreciation is better using the Opt-Out election.
• Under the Component Election, consider a cost-segregation study in cases where there may be shorter-life assets (building components) that can qualify for bonus depreciation that are within a commercial or residential building that does not qualify for bonus depreciation.
• For the new QPP deduction, consider these issues: (1) project timing; (2) election procedures; (3) use of the facility; (4) risk of recapture if the use changes over time; and (5) qualification of production activities.

• Keep detailed records about your compliance with the current rules for the tax credits in the event your claims are challenged in the future by the IRS.
• Be aware of whether individual states plan to conform to these bonus depreciation rules. Some states require a partial or total add-back of federal bonus depreciation.

Background on Bonus Depreciation and Section 168(k)

Generally, when taxpayers acquire property for business use, they must depreciate it over several years based on various depreciation schedules.

The 2017 Tax Cuts and Job Act (TCJA) enacted Section 168(k) to provide an additional 100% first-year depreciation deduction for qualified property acquired after Sept. 27, 2017, with a scheduled phase-down of the applicable percentage to zero for property placed in service on or after January 1, 2027 (and January 2, 2028, for certain long-production property and aircraft). Treasury Regulation Section 1.168(k)-2 established rules on acquisition, binding contracts, self-construction, placed-in-service rules and procedures for component elections, and rules for Section 168(k)(5), (7), and (10) elections.

The OBBB amended Section 168(k) to provide a permanent 100% additional first-year depreciation deduction for qualified property acquired and for specified plants planted or grafted after January 19, 2025. The OBBB also modified Section 168(k)(10) to permit taxpayers to elect reduced percentages (i.e., 40% or 60% for certain long-production property and aircraft) in the taxpayer’s first taxable year ending after January 19, 2025.

Additionally, the OBBB added qualified sound recording productions to the definition of qualified property for productions commencing in taxable years ending after July 4, 2025.

Notice 2026-11: Interim Guidance on Additional First Year Depreciation Deduction under Section 168(k)

Treasury and the IRS issued Notice 2026-11 on January 14, 2026, providing taxpayers with guidance on the permanent 100% additional first year depreciation deduction for eligible depreciable property acquired, or specified plants that are planted or grafted, after January 19, 2025, provided by the OBBB. The Notice also provides guidance on certain qualified sound recording productions that the OBBB added as property that may be eligible for the additional first year depreciation deduction after July 4. 2025.

The Notice addresses the expected applicability date of the forthcoming proposed regulations and the ability of taxpayers to rely on the interim guidance provided in the Notice for property placed in service in taxable years beginning before the date the forthcoming regulations are published in the Federal Register, but only if the Notice is followed in its entirety beginning with the first tax year the taxpayer relies on the Notice.

The Notice provides interim guidance to taxpayers that they may generally rely on the existing additional first year depreciation deduction regulations found in Treasury Regulation Section 1.168(k)-2. The Notice provides rules for determining whether depreciable property is eligible for the additional first year depreciation deduction and for determining the amount of such deduction allowable under the OBBB as well as elections that are available to taxpayers.

Notice 2026-11: General Application 

The Notice states that the intention is to issue proposed regulations that largely track the current regulations under Treasury Regulation section 1.168(k)-2, which would provide a framework familiar to taxpayers for eligibility, timing, and elections. The interim guidance in the Notice sets some clarity for rules on acquisition and placed-in-service dates as well as elections and the new rules on the treatment of qualified sound recording productions. Because bonus depreciation is made permanent, the Notice does not adopt the rules in the current regulations on placed-in-service dates.

Note that for qualified property acquired on or before January 19, 2025, the phasedown bonus depreciation rates enacted by the TCJA continue to apply based on the placed-in-service date for the property, i.e., 40% in 2025, 20% in 2026, and 0% in 2027 and thereafter.

Notice 2026-11: Identifying Property that Qualifies for Bonus Depreciation and Calculating the Bonus Depreciation Amount

The Notice states that taxpayers should use Treasury Regulation section 1.168(k)-2 to identify property that qualifies for the OBBB bonus depreciation and to calculate the bonus depreciation amount. The Notice explains how the TCJA regulations should be modified to account for the OBBB effective dates and the fact that OBBB bonus depreciation is permanent.

Qualified property has three elements:

• Type of property, including the same types of property that qualified for the TCJA bonus depreciation with the addition of sound recording productions;
• Original use of the property, again consistent with the TCJA rules where the acquisition of certain used property that was not previously used by the taxpayer may qualify;
• Acquisition date, i.e., property acquired after January 19, 2025, and plants that were planted or grafted after January 19, 2025, in the ordinary course of the taxpayer’s farming business.

Specifically, taxpayers will use Treasury Regulation section 1.168(k)-2 for the written binding contract, nonbinding contract, and self-construction start-of-work rules but will substitute the date of January 19, 2025, to identify whether property or specified plants were acquired, planted, or grafted by the required date.

The existing regulatory framework for binding contract rules is retained, providing that a written binding contract is a contract that is enforceable under state law against the taxpayer or a predecessor that does not limit damages to a specified amount, with special rules or cancellation periods and contingency provisions.

Consistent with the current regulations, property is considered to be self-constructed property where another person manufactures, constructs, or produces property for the taxpayer pursuant to a written binding contract that is entered into prior to the manufacture, construction, or production of the property. Such property meets the OBBB’s acquisition date rule when the taxpayer (or another person) begins the manufacture, construction, or production after January 19, 2025. The beginning of construction rules from the current regulations are used:

• Physical work test: Uses the subjective “physical work of a significant nature” test and distinguishes between significant on-site/off-site work and preliminary activities.
• 10% safe harbor: Uses the rule that construction begins at the time the taxpayer incurs (accrual taxpayer) or pays (cash basis taxpayer) more than 10% of the total cost of the property, excluding the cost of land and preliminary activities such as planning, designing, procuring financing, or researching. If property is manufactured, constructed, or produced by another person for the taxpayer, the taxpayer must satisfy this test.

For qualified sound recording productions, taxpayers are directed to treat the acquisition date as the date principal recording commences and the placed-in-service date as the initial release or broadcast.

Notice 2026-11: Elections Related to the Additional First Year Depreciation Deduction

The Notice also provides interim guidance on elections taxpayers can make for certain property to be eligible for the additional first year depreciation deduction. The Notice instructs taxpayers to make elections using the procedures consistent with Treasury Regulation Section 1.168(k)-2 and the instructions for Form 4562, Depreciation and Amortization, and to attach required statements to their timely filed return (including extensions).

The Notice also address rules for bonus depreciation in the case of consolidated groups with a specific election to avoid a required additional first-year deduction that may change the group’s intercompany profile.

Under the OBBB, taxpayers may elect:

• A transitional election under Section 168(k)(10) to deduct 40% (60% for certain property having longer production periods or certain aircraft) instead of the 100% additional first year depreciation deduction for all qualified property placed in service during the first tax year ending after January 19, 2025,
• To opt out under Section 168(k)(7) of bonus depreciation annually on a class-by-class basis (e.g., 5-year property or 7-year property), applicable to all property in the class,
• Component election to treat certain acquired or self-constructed components of larger self-constructed property as generally eligible for the additional first year depreciation deduction, and
• Not to deduct the additional first year depreciation for a qualified sound recording production

Notice 2026-16: Interim Guidance on the New Special Depreciation Allowance for Qualified Production Property

Treasury and the IRS issued Notice 2026-16 on February 20, 2026, providing taxpayers with guidance on the new temporary 100% special depreciation allowance for Qualified Production Property (QPP) in new Section 168(n) added by the OBBB (QPP Notice). This new deduction is aimed at incentivizing domestic investment in facilities used for manufacturing, production, and refining of tangible personal property.

Construction of the property must begin after January 19, 2025, and before January 1, 2029, and the property must be placed in service after July 4, 2025, and before January 1, 2031. The guidance addresses key issues relating to the qualification and computation of this new deduction and instructions on how and when to make elections, often taking the same approach as the guidance in Notice 2026-11.

Under the statute, a taxpayer that elects to designate eligible nonresidential real property as QPP may claim a first-year depreciation deduction equal to 100% of the property’s adjusted basis. The basis is then reduced to zero for purposes of computing further depreciation. QPP is defined as any nonresidential real property that is an integral part of manufacturing, refining, or other production (i.e., agricultural or chemical) activity, resulting in a product that has undergone substantial transformation.

The QPP Notice states that Treasury and the IRS intend to issue proposed regulations that are expected to be consistent with the rules in the QPP Notice. The QPP Notice asks for public comments by April 20, 2026, on several key issues including scope of activity definitions, basis allocation methods, and examples of substantial transformation.

Similar to the guidance in Notice 2026-11, the QPP Notice directs taxpayers to use rules consistent with existing Treasury Regulation Section 1.168(k)-2 for basic eligibility determinations including the Beginning of Construction (BOC) rules.

Taxpayers may rely on the QPP Notice for property placed in service in tax years beginning before the proposed regulations are published, provided that Sections 3-8 of the QPP Notice are followed in their entirety. Proposed regulations are expected to apply to property the construction of which begins after January 19, 2025, and which is placed in service in a tax year beginning on or after the date final Section 168(n) regulations are published in the Federal Register.

If you have any questions about the information in this Tax Alert or need assistance on Bonus Depreciation tax issues, please contact Susan Rogers at srogers@potomaclaw.com.