Key points covered in this article:

  • The IRS Notice 2026-11 clarifies that 100% bonus depreciation applies to qualifying assets acquired and placed in service on or after January 19, 2025, offering businesses a significant tax-saving opportunity.
  • Strategic elections, such as the transition-year and component elections, provide flexibility for businesses to optimize deductions based on their financial situations or project timelines.
  • Industries like construction, real estate, manufacturing, and healthcare can benefit from cost segregation studies and accelerated deductions for equipment, technology, and property improvements.

 

The One Big Beautiful Bill Act (OBBBA) put the 100% bonus depreciation deduction back in place permanently, starting with qualifying assets acquired and placed in service on or after January 19, 2025.

Previously, bonus depreciation was on its way to extinction. The phase-down schedule was reducing the deduction percentage each year, with an end date of 2027. Companies couldn’t confidently project the tax impact of equipment purchases or facility upgrades more than a year or two in advance. Now businesses have more space to plan ahead. However, there were still questions about certain parts of the provision.

That’s why the IRS issued Notice 2026-11 to help businesses get a better understanding of important dates, available elections, and the new category of qualifying property. The guidance explains that the existing framework for bonus depreciation will remain largely the same while incorporating the new rules. Companies that take the time to understand the nuances of this guidance may have the opportunity to reduce their tax liability and accelerate cash flow.

The Timing Rules of 100% Bonus Depreciation

The starting date is the linchpin of the new guidance. Understanding how that date applies requires attention to two separate concepts: 1) when property is acquired and 2) when it’s placed in service. Both conditions must be satisfied on or after January 19, 2025, for the 100% rate to apply.

Property is acquired when there’s a contract for its purchase that is enforceable under state law. The binding contract date is what counts, not when the start date of shopping or negotiating. If a company signed a binding contract to purchase manufacturing equipment in 2024, for example, that equipment would fall under the old phase-down rules even if it wasn’t delivered and installed until March 2025.

Placed-in-service is less complicated. It’s generally when the asset is ready and able to be used in the business. For construction projects, it can be more nuanced, particularly when dealing with large facilities or renovations that come online in stages.

Businesses will want to maintain all records showing contract dates, delivery dates, and when assets became operational. Remember, this documentation may need to be produced years later if the IRS questions anything during an audit.

Strategic Elections That Provide Flexibility

While most businesses will gravitate toward the 100% deduction, the IRS has provided elections that may produce better outcomes in specific situations.

The transition-year election allows taxpayers to choose a 40% bonus depreciation rate instead of the full 100% for property placed in service during the first taxable year ending after January 19, 2025. Why would anyone choose less? Some businesses may have unusually low income, making the full deduction less valuable. Others may have alternative minimum tax (AMT) considerations that make spreading out the deduction more beneficial. This election cannot be undone once filed, so the decision requires careful modeling.

The component election allows businesses to claim bonus depreciation on individual parts of a larger project as components become operational. In other words, companies don’t have to wait for the entire project to be complete. For companies managing large renovations or construction projects, this can dramatically accelerate cash flow. Businesses must document when each component was placed in service.

What Qualifies for the Deduction

Qualified sound recording productions is a new category added by OBBBA. This may be of particular interest for businesses that produce podcasts or any other sound recordings. Only recordings beginning production after July 4, 2025, may count for the deduction, and the deduction is claimed when the production is made available to the public. For example, a podcast that begins production in August 2025 and is released in January 2026 would generate a deduction on the 2026 tax return.

Most traditional categories of qualifying property remain unchanged. Equipment and machinery with a recovery period of 20 years or less continue to qualify, as does computer software and qualified improvement property. Also, vehicles, manufacturing equipment, technology infrastructure, and even office furniture still qualify.

Note: Bonus depreciation continues to apply to both “original use” and “used” qualifying property as long as it’s new to the taxpayer.

Implications for Construction and Real Estate

Contractors purchasing new equipment can now expense these assets in full in the year they’re placed in service. For those with large, multi-phase projects, the component election accelerates deductions by allowing bonus depreciation on systems and components as they come online, rather than waiting until substantial completion.

Real estate investors and developers may see a benefit from cost segregation studies. A cost segregation study identifies building components that can be classified as shorter-life assets, such as specialized electrical systems, plumbing, and flooring. This can help turn a long-term depreciation schedule into immediate tax savings and cash flow.

Those in manufacturing, technology, healthcare, agriculture, and many other capital-intensive industries stand to benefit as well. A manufacturer buying robotics or production equipment, a trucking company replacing its fleet, or a hospital upgrading medical equipment may all qualify for the full deduction.

Some businesses may also want to consider Section 179, if available; it may end up producing a more favorable outcome, especially for businesses in states that require an add-back of federal bonus depreciation. Businesses are encouraged to contact their tax advisor with questions.

Taking Action

To make the most of this opportunity, business leaders across industries will want to:

  • Review all pending contracts and planned expenditures to verify how the January 19, 2025, cutoff affects eligibility.
  • Identify opportunities where the component election might accelerate deductions.
  • Model whether the full 100% deduction or the transition-year election produces the better overall tax result.
  • Keep all documentation related to contracts, deliveries, and placed-in-service dates.
  • Consider cost segregation studies for real estate investments to identify assets eligible for bonus depreciation.

Looking Ahead

The new guidance is a roadmap for applying 100% bonus depreciation going forward under OBBBA. Companies are encouraged to coordinate with tax advisors to maximize this valuable opportunity. For more information on your specific situation, contact Jennifer French and Ryan Paul, Partners on PBMares’ Construction & Real Estate team