IRS Interim Guidance Provides Clarity on Bonus Depreciation Rules

The One Big Beautiful Bill Act (OBBBA) brought welcome news for businesses with the permanent return of 100 percent bonus depreciation. Businesses are now eligible to deduct the full cost of qualifying assets acquired and placed in service after Jan. 19, 2025.

Until recently, bonus depreciation was scheduled to phase out entirely under previous law. The deduction was being reduced by 20 percent each year and slated to fully expire by 2027. As the tax benefit declined, it became more difficult for businesses to plan capital investments and realize the same tax advantages on equipment purchases and facility upgrades over time. Now planning is more predictable under the OBBBA, and interim guidance recently issued by the IRS helps clarify what amendments were made and how they should be applied.

IRS Notice 2026-11 outlines the new rules for timing, elections, and what qualifies for bonus depreciation. It confirms that with the addition of the new rules, the existing framework will mostly remain unchanged. For businesses with large capital expenditures, the full and immediate expensing of qualifying assets could significantly improve cash flow and reduce the after-tax cost of acquiring equipment, machinery, and other eligible property.

Why Timing is Important for Eligibility

Timing is a critical component of the new rules. For an asset to qualify for 100 percent bonus depreciation in the first year, it matters when it was acquired and when it was placed in service.

When is an asset considered “acquired”?

The IRS looks at how the asset was purchased, which can vary depending on the situation:

• Binding contracts

If the asset is purchased under a binding written agreement, the acquisition date is tied to when the contract becomes enforceable under state law, which is not always the same as the signature date. In real estate deals with contingencies, or in construction, where a contract may allow termination if permits aren’t secured or financing falls through, the agreement may not be considered binding yet. In those cases, different acquisition rules may apply.

• Non-binding agreements

If there’s no binding contract in place, the timing is much more straightforward. The acquisition date is generally when the business has paid or committed more than 10 percent of the total cost of the asset (excluding land and early-stage costs), based on its accounting method. If a hotel, for example, signs a contract in 2024 to purchase new guest room furniture and gym equipment for a remodel but doesn’t install it until later the following year, the earlier agreement would place the purchase under the prior phase-down rules, qualifying for only 40 percent bonus depreciation.

• Self-constructed assets

For assets that are built or produced, acquisition begins when construction starts. A common benchmark is when about 10 percent of the total cost has been spent.

When is an asset considered “placed in service”?

Depending on the nature of the asset, “placed in service” generally means when the piece of equipment, machinery, or other qualifying property is ready and available for its specific use.

It can be more complex for construction projects, such as in the case of a multifamily project when some units may be finished and leased, but others are not. Completed units can be placed in service as they become ready, rather than waiting for the entire project to be complete.

When a Special Election Produces a Better Outcome

The OBBBA and interim guidance still retain the flexibility of choosing how much bonus depreciation to claim, if any at all. In most situations, businesses will elect to expense the full allowable deduction; however, there are specific cases when a lower bonus rate may be a better strategy, specifically when managing taxable income, net operating losses, or the tax impact on pass-through owners.

The guidance explains that businesses can opt for the 40 percent bonus rate (or 60 percent for property with longer production periods) in the first taxable year ending after Jan. 19, 2025. The caveat is that if a business chooses the reduced bonus rate for the transition year, it will be applied across the board to all qualifying assets. Outside of the transition year, however, the general rules typically provide more flexibility to apply bonus depreciation by asset class.

Businesses may also be eligible to take advantage of component elections, which allow individual parts of a larger project to qualify for full expensing. This strategy can be valuable for multi-year projects that carry over between the old and new rules or for businesses that want to deduct portions of a project as they are completed, freeing up cash that can then be reinvested back into the project.

Which Property Qualifies for the Deduction

The OBBBA introduced a new category for businesses primarily in the media and entertainment space. Certain sound recording productions created after July 4, 2025, are now eligible property for bonus depreciation. Businesses can claim the deduction in the year the property is first released.

Separate guidance under IRS Notice 2026-16 also offered detailed rules on a new provision for qualified production property (QPP), allowing certain production-related facilities used by manufacturers, agricultural producers, and chemical processors to be fully expensed in the year they are placed in service. Under previous law, those costs would have been spread out over decades.

The notice explains what types of facilities and improvements qualify, how ‘production’ is defined, and the steps required to make the election, as well as considerations if the property is later sold or repurposed.

The core categories of qualifying property and their recovery periods have stayed the same, namely equipment, machinery, software, and interior improvements, along with vehicles and office furnishings. Bonus depreciation still applies to both new and used property, provided it is new to the business.

Next Steps

Now that 100 percent bonus depreciation is back in place, businesses that take the time to understand the new rules may be able to fully capitalize on the opportunity to reduce tax exposure and accelerate cash flow.

Maintaining detailed records to support acquisition and placed-in-service timing, evaluating election strategies based on overall tax position, and staying aware of how state rules differ will help ensure the benefit is applied effectively, especially as some states require a partial or full add-back of federal bonus depreciation.

To enhance these benefits even further, businesses may also consider a cost segregation study to identify building components that could qualify for accelerated depreciation. It can be most valuable for newly constructed buildings, recently acquired properties with significant depreciable components, and renovation or repositioning projects.

Contact your R&A advisor to evaluate how these rules apply to your specific situation.