This article was written by Ashley Sullivan, CCSP, Partner MSC, President, American Society of Cost Segregation Professionals.
Notice 2026‑11 marks a significant turning point in the bonus depreciation landscape, reaffirming the long‑standing §168(k) framework while updating key dates to reflect the One Big Beautiful Bill Act (OBBBA). Although the mechanics remain largely unchanged, the new acquisition cutoff date and the elimination of placed‑in‑service deadlines create substantial planning opportunities — particularly for construction projects and cost segregation analyses.
Under OBBBA and Notice 2026‑11, qualified property acquired after January 19, 2025, qualifies for permanent 100% bonus depreciation with no scheduled phase‑down. Property acquired on or before that date remains subject to the TCJA phase‑down rules. The Notice effectively substitutes the TCJA’s original dates with new ones:
- January 19, 2025 replaces September 27, 2017
- January 20, 2025 replaces September 28, 2017
In short: the rules didn’t change — the dates did.
1. Continuation of the TCJA Framework
Notice 2026‑11 confirms that the IRS will continue applying the familiar TCJA transition rules to determine acquisition and placed‑in‑service dates. Taxpayers must continue relying on:
- Written Binding Contract (WBC) Test
- Physical Work Test
- 10% Safe Harbor
- Preliminary Activity Exclusion
The only modification is the updated cutoff date:
Replace September 27, 2017 → January 19, 2025
These rules remain the backbone for determining whether a project falls under the TCJA phasedown rates or OBBBA’s permanent 100% bonus depreciation.
2. Key OBBBA Changes
A. Placed‑In‑Service Deadlines Eliminated
Under OBBBA, there is no longer any placed‑in‑service deadline for bonus depreciation eligibility.
Previously, TCJA required most qualified property to be placed in service before January 1, 2027 (or January 1, 2028 for LPP property and aircraft). Under the new rules, property placed in service in later years may still qualify as long as it is acquired after January 19, 2025.
This greatly simplifies long‑term planning for multi‑year construction projects.
B. Long‑Production‑Period (LPP) and Aircraft Rules Removed
OBBBA eliminates:
- Special LPP acquisition deadlines
- 1.168(k)-2(d) LPP qualification rules
- The TCJA framework distinguishing LPP from standard §168(k) assets
All assets now qualify under a single, uniform acquisition‑date standard.
C. New Eligible Property Categories
OBBBA expands eligible property to include:
- Qualified sound recording productions
- Qualified production property under §168(n)
- Certain manufacturing‑related assets (subject to future regulations)
These additions broaden the scope of property eligible for accelerated cost recovery.
3. Acquisition Timing & the 10% Safe Harbor
The 10% physical work safe harbor remains the most important factor in determining whether a project falls under TCJA’s phasedown rates (e.g., 40% for 2025) or OBBBA’s permanent 100% bonus.
The Rule
A project is treated as having begun construction when the taxpayer has paid or incurred more than 10% of total project costs — excluding land and preliminary activities.
Thus, amounts paid or incurred before January 19, 2025, may indicate pre‑cutoff acquisition.
Practical Application
- >10% incurred on or before Jan. 19, 2025 → TCJA rates apply (40% for 2025)
- ≤10% incurred on or before Jan. 19, 2025 → OBBBA 100% bonus applies
This rule did not change — only the date did.
4. Strategic Planning Opportunities
Within this updated framework, two major planning opportunities emerge:
A. Component Election for 100% Bonus on Real Estate Components
Allows taxpayers to secure 100% bonus depreciation on qualifying §1245 components even when the building itself falls under the prior 40% rules.
B. Election to Use 40% Bonus Instead of 100% (2025 Only)
Provides taxpayers with a one‑year opportunity to manage taxable income by electing the lower bonus rate.
Together, these elections give taxpayers meaningful control over the amount of bonus depreciation recognized in a given year.
5. Component Election: Why It Matters Now
The component election under §1.168(k)-2(c) remains one of the most powerful tools for securing bonus eligibility for §1245 property. The TCJA 2019 final regulations include an example (“Example 4”) that mirrors the fact pattern most commonly encountered in practice — and it remains directly relevant under today’s rules.
The election allows taxpayers to:
- Separate §1245 property from a larger building project
- Evaluate those components independently
- Potentially qualify components for higher bonus rates even when the building is not qualified property
This is especially valuable for:
- Projects that straddle the old and new cutoff dates
- Projects with mixed pre and post cutoff costs
- Renovations or expansions where §1245 assets form a significant portion of total investment
- Any situation where the building is completely ineligible, but its components may be eligible
Because Notice 2026‑11 retains the structure of §1.168(k)-2(c), the component election is just as powerful — if not more — under OBBBA.
6. Key Opportunity: 2019 Final Regulation Example 4
The following example remains exactly as written in the 2019 final regulations and continues to apply under Notice 2026‑11.
Facts (Simplified)
- In March 2017, BG hired CH to build a retail building.
- Contract is not a binding written contract.
- Building placed in service in September 2019 for $10M total, composed of:
- $3M 1245 property
- $7M building
- Pre Sept. 27, 2017 costs:
- $500,000 (1245 components)
- $3,000,000 (building)
- BG makes the component election on its timely filed 2019 return.
Step 1 — Identify the Larger Self Constructed Property
Under the regulations, §1245 assets are treated as a separate self-constructed property group because:
- 1245 components are described in §1.168(k)-2(b)(2)(i)(A)
- Buildings are not
Thus, the “larger” property for the election is the $3M of §1245 components, not the $10M building project.
Step 2 — Apply the 10% Test to the Components
Test: Did BG incur >10% of the §1245 property cost before Sept. 28, 2017?
- Pre cutoff costs: $500,000
- Total 1245 cost: $3,000,000
- 10% threshold: $300,000
Since $500,000 > $300,000, construction of the §1245 property began before the cutoff.
Step 3 — Determine Bonus Eligibility Under the Election
Because BG made the election:
- 1245 Components
- $2,500,000 (post cutoff costs) → 100% bonus
- $500,000 (pre cutoff costs) → 30% bonus under §168(k)(8)
Building (Nonresidential Real Property)
- Entire $7,000,000 remains ineligible for bonus under both:
- Current §168(k)
- Pre-TCJA §168 (k)
7. Why This Example Still Matters
Example 4 demonstrates how taxpayers can salvage bonus depreciation on §1245 components even when the building itself is ineligible. This scenario is extremely common in real‑world practice, particularly for:
- Construction spans multiple years
- AIA draws occur before and after critical cutoff dates
- The building fails bonus eligibility, but the §1245 assets do not
- The client has significant Qualified Improvement Property, equipment like systems, or other discrete §1245 components
Cost segregation is essential for identifying and isolating these assets.
Key Takeaways
Notice 2026‑11 confirms that bonus depreciation remains grounded in the TCJA framework, with updated acquisition dates driving eligibility under OBBBA’s permanent 100% bonus rules. For projects crossing the January 19, 2025, threshold, the written binding contract rules, physical work test, and 10% safe harbor remain decisive.
Most importantly, the component election continues to offer one of the highest‑value opportunities for securing bonus depreciation on §1245 property even when the building itself is ineligible. As cost segregation professionals navigate this new environment, mastery of these transition rules will be essential for unlocking substantial tax benefits and delivering strategic value to clients.
If you have any questions or are interested in learning more, don’t hesitate to reach out today!
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.