IRS Notice 2026-11: What Businesses Need to Know
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IRS Notice 2026-11 provides critical interim guidance on the “One Big Beautiful Bill Act” (P.L. 119-21), which permanently restored 100% bonus depreciation for qualified property. While the notice largely carries forward existing regulations under Internal Revenue Code Section 168(k), it introduces an important planning opportunity for businesses constructing their own assets — the component election.
For developers, manufacturers, and businesses undertaking major capital projects, this guidance creates a meaningful opportunity to maximize deductions in 2026 and beyond.
For official IRS guidance on bonus depreciation under Section 168(k), see the Internal Revenue Service page on Bonus Depreciation:
https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFRc4930337f38ecfd/section-1.168(k)-2
The Challenge of Self-Constructed Property
Under the updated law, property must be acquired and placed in service after January 19, 2025, to qualify for the permanent 100% bonus depreciation rate.
For self-constructed assets, “acquisition” occurs when either:
- Physical work of a significant nature begins, OR
- The taxpayer incurs more than 10% of the total expected project costs (the 10% safe harbor rule)
If either threshold was met before January 20, 2025, the general rule is that the entire project becomes ineligible for the 100% rate, reverting instead to prior bonus rates such as 40% or 60%, depending on timing.
This creates a significant limitation for long-term construction projects that began before the effective date.
More information on placed-in-service rules and depreciation timing can be found in IRS Publication 946 (How To Depreciate Property):
What’s New for 2025
The Solution: The Component Election
The component election under Treasury Regulation §1.168(k)-2(c)(6) provides a powerful workaround to the “all-or-nothing” rule.
By making a component election, taxpayers may treat specific components of a larger self-constructed asset as separate property. If those components are acquired or constructed after January 19, 2025, they may independently qualify for 100% bonus depreciation — even if the larger overall project does not.
This creates a targeted opportunity to preserve enhanced deductions on qualifying portions of a project.
How It Works in Practice
| Scenario | Eligibility |
|---|---|
| Overall Project (Started October 2024) | Ineligible for 100% rate (uses prior applicable rate) |
| Later Components (Work Began February 2025) | Eligible for 100% rate via Component Election |
Example:
A real estate developer begins construction of a building shell in October 2024. Because significant physical work started before January 20, 2025, the structure itself does not qualify for the permanent 100% bonus depreciation rate.
However, flooring systems, cabinetry, HVAC upgrades, or specialized electrical systems installed beginning in February 2025 may qualify separately if the developer properly elects to treat them as individual components. This allows the taxpayer to claim a full 100% deduction on those qualifying costs.
The regulations governing component elections are found under Treasury Regulation §1.168(k)-2, available through the Electronic Code of Federal Regulations (eCFR):
https://www.ecfr.gov/current/title-26/section-1.168(k)-2
Key Requirements for Taxpayers
To successfully leverage the component election under IRS Notice 2026-11, businesses must prioritize careful compliance.
1. Timely Election
The component election must be made by attaching a statement to the taxpayer’s federal income tax return for the year the property is placed in service. Failure to properly attach the statement may forfeit eligibility.
Guidance on making elections and filing procedures can be found in IRS Form 4562 instructions (Depreciation and Amortization):
https://www.irs.gov/forms-pubs/about-form-4562
2. Granular Documentation
Detailed documentation is essential. Businesses should maintain clear records that distinguish:
- The start date of physical work on each component
- Cost allocations between the overall project and individual components
- Dates of payment and cost incurrence
Without proper substantiation, the IRS may challenge eligibility during examination.
3. Consistency Requirement
Notice 2026-11 requires taxpayers to apply the guidance consistently across all eligible property until final regulations are issued. Selective or inconsistent application may create audit exposure.
Strategic Planning Opportunities for 2026
The restoration of permanent 100% bonus depreciation significantly enhances cash flow planning for capital-intensive businesses. When combined with the component election, companies can:
- Accelerate deductions on qualifying project elements
- Improve short-term liquidity
- Offset taxable income more effectively
- Enhance project ROI modeling
However, the technical rules are complex. Timing tests, safe harbor thresholds, and regulatory elections must be carefully coordinated.
Businesses with projects spanning 2024 and 2025 should conduct a proactive depreciation review before filing their 2026 tax returns.
Conclusion
IRS Notice 2026-11 provides more than procedural guidance — it delivers a strategic tax planning opportunity. While self-constructed property that began before January 20, 2025 may fail the timing test for permanent 100% bonus depreciation, the component election offers a pathway to preserve enhanced deductions on qualifying portions of the project.
With careful documentation, timely elections, and consistent application of the rules, taxpayers can maximize the benefits of the One Big Beautiful Bill Act while maintaining compliance with Section 168(k).
Businesses undertaking construction or capital expansion projects should consult their tax advisor to evaluate whether a component election strategy could significantly improve their 2026 tax position. To discuss your situation with our team, contact Littlefield, Fanning & Co. Services, LLC today.