IRS Notice 2026-11: Claim 100% Bonus Depreciation in 2026

What Changed Under the OBBBA

The 2017 Tax Cuts and Jobs Act (TCJA) originally allowed 100% bonus depreciation for qualified property placed in service from September 28, 2017, through the end of 2022. After that, the percentage was scheduled to phase down: 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026, with the deduction disappearing entirely in 2027.

The OBBBA, signed on July 4, 2025, reversed the phase-down and made 100% bonus depreciation permanent for qualified property acquired after January 19, 2025. Notice 2026-11 confirms the IRS will apply the existing regulatory framework under Treasury Regulation Section 1.168(k)-2. The notice substitutes January 19, 2025, for the original September 27, 2017, cutoff date. Familiar rules on acquisition timing, written binding contracts, and elections carry forward with only minor adjustments.

Key numbers at a glance

• 100% — permanent first-year bonus deduction for property acquired after Jan 19, 2025
• $2.56M — Section 179 maximum deduction for 2026 (phase-out begins at $4.09M)
• 15 years — QIP recovery period under MACRS
• 20 years — maximum MACRS recovery period for bonus-eligible property
• 40% / 60% — transition election rates for the first tax year ending after Jan 19, 2025

Sources: IRS Notice 2026-11; OBBBA §70301; Treasury Reg. §1.168(k)-2.

What Property Qualifies for 100% Bonus Depreciation?

Under Notice 2026-11, 100% bonus depreciation applies to most tangible personal property with a MACRS recovery period of 20 years or less. This covers a wide range of business assets: machinery, equipment, furniture, vehicles, computer software, and certain building improvements.

Both new and used property are eligible, with one restriction: you must not have previously used the asset. A business buying used equipment from an unrelated seller can claim the full deduction as long as the acquisition and placed-in-service dates both fall after January 19, 2025.

Property that does not qualify includes 27.5-year residential rental property and 39-year nonresidential real property (the building structure itself). However, a cost segregation study can reclassify specific building components, such as electrical systems, specialized HVAC, or flooring, into shorter recovery periods that make them eligible. For real estate and construction clients, cost segregation is now more valuable than ever.

Qualified Improvement Property: A Major Opportunity

One of the most significant categories for Colorado business owners is qualified improvement property (QIP). QIP refers to improvements made to the interior of a nonresidential building after the building has been placed in service. Common examples include tenant buildouts, new lighting, flooring, ceiling work, interior walls, and HVAC systems.

QIP does not include:

• Enlargements to the building itself
• Elevators or escalators
• Changes to the internal structural framework of the building

QIP carries a 15-year recovery period under MACRS, which falls under the 20-year threshold for bonus depreciation eligibility. The OBBBA permanently restored 100% bonus depreciation for QIP acquired and placed in service after January 19, 2025. That means a restaurant spending $400,000 on a full interior renovation in 2026 can deduct the entire amount in that tax year, rather than spreading it over 15 years (about $26,667 per year). At a 37% federal marginal rate, the cash-flow swing is roughly $138,400 in year one.

QIP is also eligible for Section 179 expensing, which the OBBBA expanded to a $2.5 million maximum deduction (adjusted to $2.56 million for 2026) with a phase-out threshold of $4.09 million. Section 179 covers some items beyond the QIP definition, including nonresidential roofs, HVAC systems, fire protection and alarm systems, and security systems. Unlike bonus depreciation, Section 179 cannot create a net operating loss and is elected on an asset-by-asset basis. Many businesses use both provisions together: Section 179 first for flexibility, then bonus depreciation on remaining eligible basis.

QIP Timing Rules to Watch

Improvements completed during a building’s original construction do not qualify as QIP, even if they otherwise meet the criteria. The improvement must be placed in service after the building itself was first placed in service.

Lease-related improvements can also qualify, as long as the lease is not between related parties. A tenant investing in buildout work on a leased commercial space can claim the deduction, provided the tenant pays for the improvements and meets the other requirements.

One Important Trade-Off: The Section 163(j) Election

Businesses that elect real property trade or business status under Internal Revenue Code (IRC) Section 163(j), which removes the limit on deductible business interest expense, are required to depreciate QIP under the Alternative Depreciation System (ADS). ADS extends the QIP recovery period to 20 years and eliminates bonus depreciation eligibility. This is a meaningful tradeoff that deserves careful modeling. A real estate investor carrying significant debt should compare the benefit of unlimited interest deductions against the loss of accelerated depreciation on QIP before making the Section 163(j) election.

The 40%/60% Transition Election

For property placed in service in the first tax year after January 19, 2025, taxpayers can elect a reduced first-year rate instead of the full 100%. Under IRC Section 168(k)(10):

• 40% bonus depreciation for most qualified property
• 60% bonus depreciation for certain long-production-period property and certain aircraft

This election applies to all qualified property acquired in that first tax year, not on an asset-by-asset basis. It is made by attaching a statement to the timely filed federal tax return (including extensions) for the year that includes January 20, 2025.

When Might You Choose 40% Instead of 100%?

Some situations make a smaller first-year deduction the smarter play. Large first-year deductions can trigger the excess business loss limitation for noncorporate taxpayers or reduce qualified business income (QBI) in ways that limit other tax benefits.

If you expect your income or tax rate to be higher in future years, spreading the deduction over time may produce more total tax savings.

Recapture is another consideration. Personal property (equipment, furniture, fixtures) depreciated using bonus depreciation is recaptured as ordinary income on sale, taxed at rates up to 37% under Section 1245. By comparison, straight-line depreciation on real property is recaptured at a maximum rate of 25% as unrecaptured Section 1250 gain. For properties you plan to hold short-term, the recapture math matters.

The Component Election: Phased Construction Projects

The component election may be the most tactically valuable provision in Notice 2026-11 for businesses with construction or renovation projects underway. It lets taxpayers treat individual components of a larger self-constructed property as separately eligible for bonus depreciation, even if the overall project started before January 20, 2025.

How It Works

Under the existing regulations, self-constructed property is treated as “acquired” when substantial physical work begins or when the taxpayer has incurred more than 10% of the total expected hard construction cost (the 10% safe harbor). Only direct construction expenditures count toward this threshold: materials, labor, and contractor payments. Architectural fees, permitting costs, engineering studies, and other soft costs do not.

If the overall project crossed the 10% threshold before January 20, 2025, the project as a whole falls under the prior TCJA bonus depreciation rates (40% for 2025). But with the component election, individual building systems or components that had not reached the 10% threshold by January 19, 2025, can qualify for 100% bonus depreciation under the OBBBA rules. A taxpayer can claim 100% bonus on components of a larger property even if the larger property itself does not qualify.

Note: The 10% safe harbor rule helps determine when self-constructed property is considered “acquired.” It does not itself allow bonus depreciation unless the elected component is also placed in service.

Consider a manufacturer building a new $8 million production facility. Site work and foundation began in October 2024 with about $1.2 million already spent, putting the overall project past the 10% threshold before the cutoff. But the interior electrical, HVAC, and specialized production equipment, totaling roughly $2.4 million, were not ordered or installed until mid-2025. Using the component election, those later components can qualify for 100% bonus depreciation, even though the building shell does not. At a 37% rate, that’s $888,000 in first-year tax savings the manufacturer would otherwise have spread over years.

The election requires a statement attached to the tax return identifying the specific components. Documentation of when each component’s work began and when costs were incurred is essential for audit defense.

Practical Steps for Colorado Business Owners

Notice 2026-11 creates planning opportunities, but the timing and documentation requirements are strict. Here is what you should be doing now:

• Review acquisition timelines. The date a binding contract becomes enforceable, not the closing date, determines which depreciation rules apply. If you signed a purchase agreement before January 20, 2025, the property may fall under the old TCJA rates regardless of when you placed it in service.
• Consider cost segregation. For any commercial property acquisition or renovation, a cost segregation study can identify building components that qualify for 100% bonus depreciation. The permanent rate makes these studies more valuable than they have been in years.
• Evaluate the component election for active projects. If you have a construction or renovation project that began before the cutoff date, the component election could still capture 100% bonus treatment on work completed after January 19, 2025.
• Model the impact on QBI. Bonus depreciation reduces net business income, which in turn reduces the Section 199A QBI deduction. For Colorado pass-through owners above the state add-back thresholds, this interaction requires careful analysis.
• Keep detailed records. Maintain documentation showing contract dates, cancellation periods, when physical work began, and when costs crossed the 10% threshold. This applies whether you are purchasing, building, or renovating.

Frequently Asked Questions

Does my used equipment qualify for 100% bonus depreciation?

Yes, as long as you have not previously used the asset and you acquired it from an unrelated party. Both the acquisition date and the placed-in-service date must fall after January 19, 2025.

Can I still claim 100% bonus depreciation on a project that started in 2024?

Possibly, through the component election. If the overall project crossed the 10% safe harbor before January 20, 2025, the project as a whole falls under the older 40% rate. But individual components that had not reached the 10% threshold by that date can qualify for 100% bonus depreciation.

How does Section 179 differ from bonus depreciation?

Section 179 has a dollar cap ($2.56 million for 2026), phases out above $4.09 million in qualifying purchases, and cannot create a net operating loss. Bonus depreciation has no cap, no phase-out, and can create a loss. Section 179 is elected asset-by-asset; bonus depreciation applies automatically unless you elect out by class. Many businesses use Section 179 first for flexibility, then bonus depreciation on remaining basis.

Will Colorado require an add-back for federal bonus depreciation?

No. Colorado is a rolling conformity state and accepts the federal bonus depreciation deduction without modification. The 100% deduction flows directly into your Colorado taxable income with no state add-back.

What documentation should I keep for the component election?

Keep the signed election statement attached to your return, plus records of when each elected component’s physical work began, the costs incurred for that component, and how those costs were tracked separately from the overall project. The election identifies specific components, so audit defense depends on showing those components were not part of the overall property’s 10% safe harbor calculation.

Last reviewed by the WhippleWood tax team on May 5, 2026. Sourced from the Internal Revenue Service (Notice 2026-11), U.S. Treasury, OBBBA §70301, Treasury Reg. §1.168(k)-2, and Bloomberg Tax state conformity tracking.

How WhippleWood Can Help

The return of permanent 100% bonus depreciation is one of the biggest tax planning tools for Colorado businesses. Whether you are buying equipment, renovating a commercial space, or in the middle of a construction project, the timing and election decisions under Notice 2026-11 shape your tax bill.

We model component-election timing and the Section 163(j)/QIP tradeoff side-by-side so you see the dollar impact before you file. Contact WhippleWood to schedule a conversation.

Quick Glossary

Bonus Depreciation

A first-year deduction for the cost of qualifying business assets, currently 100% under the OBBBA.

MACRS (Modified Accelerated Cost Recovery System)

The federal depreciation system that assigns each asset class a recovery period (years to fully depreciate). Property with a 20-year or shorter recovery period is bonus-eligible.

QIP (Qualified Improvement Property)

Interior improvements to a nonresidential building made after the building was first placed in service. 15-year MACRS class. Bonus-eligible.

ADS (Alternative Depreciation System)

A slower, straight-line depreciation method required for certain elections. Disqualifies property from bonus depreciation.

Section 179

An election to expense qualifying property up to a dollar cap ($2.56M for 2026). Cannot create a net operating loss; chosen asset by asset.

Section 163(j)

The federal cap on deductible business interest expense. Real property businesses can elect out, but must depreciate QIP under ADS as a tradeoff.

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