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IRS Issues Guidance on Permanent 100% Depreciation

IRS Issues Guidance on Permanent 100% Depreciation

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New 100% Depreciation Guidance on Elections, Components, and Self-Constructed Property

The IRS has come out with initial guidance on permanent 100% bonus depreciation put in place by H.R. 1, the One Big Beautiful Bill Act (OBBBA). Notice 2026-11 is intended to bridge the gap between existing bonus depreciation rules and new proposed regulations which will eventually be released. Taxpayers may follow the prior rules with the new dates for eligibility superimposed.

The Notice clarifies the treatment of self-constructed property, components, and sound recording productions, and also guides taxpayers on making elections under the new depreciation framework.

The OBBBA made permanent full expensing of business assets, or “additional first-year depreciation,” in the year they are placed in service. Bonus depreciation had been phasing down and was set to expire after 2026 in the original TCJA. The 2025 law boosted it back up to 100% for property acquired and placed in service after January 19, 2025.

Eligible Property

In general, the following types of property qualify for 100% additional first year depreciation:

  • new and used tangible property with a MACRS recovery period of 20 years or less, such as office furniture, computers, vehicles, and machinery
  • Non-custom computer software (off-the-shelf)
  • interior improvements to nonresidential buildings
  • water utility property 
  • certain film, TV, and theatrical productions  
  • sound recording productions 
  • trees/vines/fruit-bearing plants when planted or grafted

Elections for First Year Depreciation

Under OBBBA, taxpayers can make the following elections related to the new depreciation rules:

  • To deduct 40% (60% for property having longer production periods or certain aircraft) instead of the 100% additional first year depreciation deduction for property placed in service during the first tax year ending after January 19, 2025.
  • To treat acquired or self-constructed components of larger self-constructed property as independently eligible for additional first year depreciation even if the overall project does not qualify because of timing.
  • Not to deduct additional first year depreciation for a qualified sound recording production.
  • To deduct additional first year depreciation for one or more specified plants (fruit or nut-bearing trees or vines) used in a farming business.
  • Not to elect bonus depreciation for a category of property. As under prior law, the election will apply to all property in that class.

Sound Recording Productions

The Notice also describes how newly eligible sound recording productions will be treated under the new law. In general, a qualified sound recording production:

  • Is treated as acquired on the date principal recording begins,
  • Is considered placed in service at the time of initial release or broadcast, and
  • Qualifies for the additional first year depreciation deduction if the sound recording production commences in a taxable year ending after July 4, 2025.

Conclusion

The IRS is expected to issue proposed regulations on these and other issues related to the implementation of 100% bonus depreciation. Until then, taxpayers may rely on the guidance in the Notice.

It is important to understand that, sometimes, taxpayers may not want to use 100% depreciation for a variety of reasons. For example, taxpayers in a loss position may not want to create a significant net operating loss. Also, taxpayers may not want all assets in a class to be completely written off in the first year. In short, a significant amount of tax planning may go into these decisions. Given that elections need to be made, generally on tax returns, it is important to consult your Frazier & Deeter tax advisor to discuss your options for taking advantage of the new depreciation rules.

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