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Notice 2026-11 Provides Clarity on Bonus Depreciation for Cost Segregation

Article

January 26, 2026

On January 14, 2026, the Internal Revenue Service (IRS) released Notice 2026-11 (Interim Guidance on Additional First Year Depreciation Deduction under Section 168(k)), providing guidance for the now-permanent 100% bonus depreciation under Section168(k), as established by Public Law (P.L.) 119-21, commonly known as the “One Big Beautiful Bill Act.” This Notice explains how taxpayers should apply existing regulations to property acquired and placed in service after January 19, 2025, until new regulations are issued.

Bonus depreciation allows eligible business property to be fully expensed in the year it is placed in service rather than depreciated over its normal recovery period. The Notice retains the existing Treasury Regulation (Tres. Reg.) Section 1.168(k) regulatory rules, including how to determine acquisition dates, when property is placed in service, and available elections, but substitutes the relevant dates under P.L. 119-21. Prior to the passage of P.L. 119-21, the bonus depreciation percentage was:

40% for qualified property placed in service during 2025.
60% for certain property having longer production periods or certain aircraft placed in service during 2025.
40% for specified plants planted or grafted during 2025.

What Notice 2026-11 Provides

Notice 2026-11 bridges the old Section 168(k) bonus depreciation rules and the new P.L. 119-21 timing requirements, allowing taxpayers to rely on the current regulatory framework with substituted dates.
For self-constructed property, eligibility hinges on application of the physical work test and the 10% safe harbor under the substituted dates.
The component election lets taxpayers treat certain later-acquired or later-worked components of a larger project as separately qualifying for 100% bonus depreciation even if the overall project does not meet the timing test.
Proper documentation and timely election statements are essential to substantiate these positions before final regulations are issued.

Self-constructed Property and the Existing Framework

Self-constructed property includes assets a taxpayer constructs or produces for its own use (e.g., buildings, facilities, or improvements). Under the bonus depreciation regulations under Treas. Reg. Section 1.168(k)-2, self-constructed property can be eligible for bonus depreciation if the taxpayer satisfies certain requirements — most importantly, the acquisition and placed-in-service timing tests. These rules carry forward with Notice 2026-11, with the applicable P.L. 119-21 dates substituted.

A key issue for self-constructed property is when a taxpayer is treated as having “acquired” the property for bonus depreciation purposes:

Purchased Property

For purchased property, acquisition occurs when the taxpayer enters a binding written contract. Notice 2026-11 confirms that the written binding contract rules under the current regulations still apply for P.L. 119-21 purposes.

Treas. Reg. Section 1.168(k)-2(b)(5)(ii)(B) provides that the acquisition date of property that the taxpayer acquired pursuant to a written binding contract is the later of:

The date the contract was entered into;
The date the contract is enforceable under State law;
If the contract has one or more cancellation periods, the date that all cancellation periods end; or
If the contract has one or more contingency clauses, the date conditions subject to such clauses are satisfied.

Self-constructed Property

For self-constructed property, the concept of acquisition is tied to when the taxpayer begins physical work on the property or incurs more than a certain threshold of costs (the 10% safe harbor). Historically, the existing regulations treat construction as begun when either:

Physical work of a significant nature starts, or
More than 10% of the total expected cost for the asset has been incurred or paid.

Notice 2026-11 directs taxpayers to continue applying these tests, but with the January 19, 2025, (or January 20, 2025) date substitutions, the critical question is whether the physical work or the 10% cost occurs before January 20, 2025.

The Component Election

One of the most important planning opportunities for self-constructed property under Notice 2026-11 is the component election under Treas. Reg. Section1.168(k)-2(c)(6).

What the Component Election Does

If a taxpayer is self-constructing property, and the activities began before January 20, 2025 (i.e., the physical work/10% tests were met before that date), the entire project normally would not qualify for the 100% bonus depreciation per P.L. 119-21 because it would be treated as acquired before January 20, 2025.

However, certain smaller components of that larger property might themselves be acquired or undergo physical work after January 19, 2025.

By making the component election, the taxpayer can treat one or more of these later-acquired components as independently eligible for the 100% bonus depreciation deduction even though the larger project started earlier.

Example of Applying the Component Election

Assume a developer began physical construction on a commercial building in October 2024.

Foundation work and initial structural framing began before January 19, 2025. Accordingly, the overall project would not qualify for the 100% bonus deduction per P.L. 119-21.

Later in February 2025, the developer purchases and installs vinyl flooring, cabinetry, and equipment requiring dedicated electrical wiring. These finishes and systems were acquired or installed after January 19, 2025, so they can qualify as individual components that meet the P.L. 119-21 timing test.

By making the component election on the timely filed tax return for the year the property is placed in service, a developer can claim 100% bonus depreciation on those qualifying components even if the overall build project does not qualify.

This election requires a statement attached to the tax return identifying the components for which the election is made.

Application of the Physical Work Test

The existing bonus depreciation regulations use a mix of physical work and cost thresholds to determine when construction begins for self-constructed property. Although Notice 2026-11 does not rewrite these tests, it confirms that taxpayers should follow them with the updated P.L. 119-21 dates:

Physical Work Rule: Work that is significant and integral to the project counts as beginning construction (e.g., laying foundations or erecting structural elements).
10% Safe Harbor: If a taxpayer incurs more than 10% of the total expected cost, construction is treated as begun. Financial activity that is not physical work (like design or planning) does not count toward this threshold.

These tests matter because they determine when the property (or its components) is considered acquired to determine whether the bonus depreciation rules apply, and therefore whether 100% bonus depreciation is available under the P.L. 119-21 dates.

Other Items Addressed in the Notice

Notice 2026‑11 also reiterates the availability of other related elections, including:

The ability to elect a reduced additional first‑year depreciation deduction of 40% for their first taxable year ending after January 19, 2025 (60% for certain long production period property and aircraft).
Electing out of bonus depreciation for any class of property.
Elections relating to sound recording productions.

Practical Planning Implications

Documentation

Maintain detailed records showing when physical work began and when the 10% cost threshold was met for overall projects and for major components. Records help establish whether the construction began before or after January 20, 2025 (for the 100% bonus per P.L. 119-21 test).

Component Election Offers Value

The component election allows taxpayers to capture the 100% bonus depreciation on eligible components of larger projects that otherwise would not qualify. For large developments with staggered workstreams (e.g., shell work versus interiors), identifying later work as separate components may preserve bonus depreciation.

Ongoing Reliance and Consistency

Taxpayers may rely on Notice 2026-11 immediately for tax years before the final regulations are issued, but must apply the guidance consistently across all eligible property in those years.

Qualified Production Property (QPP)

The notice does not address the QPP regime.

Your Guide Forward

To navigate these changes with confidence and determine a strategy that is optimized for both compliance and cash flow, engage Cherry Bekaert’s Tax Credits & Incentives Advisory professionals. Our tax advisors can help you identify eligible opportunities, model tax impacts and implement a forward-looking plan tailored to your firm’s goals.

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