The Tax Cuts and Jobs Act (TCJA) allowed 100 percent bonus depreciation under I.R.C. § 168(k) through 2022 for qualifying property acquired and placed in service after September 27, 2017. It then established a phase-out over the next four years, in increments of 20 percent. For assets placed in service in 2025, the phase-out limited the bonus depreciation deduction to 40 percent of the basis. Bonus depreciation was scheduled to end in 2027.
The One Big Beautiful Bill Act (OBBBA) permanently increased bonus depreciation to 100 percent of basis for qualified property acquired after January 19, 2025. I.R.C. § 168(k). This includes trees and vines planted or grafted after January 19, 2025, for which an I.R.C. § 168(k)(5) election is made. OBBBA also provided a special provision allowing taxpayer to elect to apply 40 percent bonus depreciation to property placed in service during the first taxable year ending after January 19, 2025. This 40 percent option also applies where trees and vines are planted or grafted during the first taxable year ending after January 19, 2025.
Note: Forty percent bonus depreciation automatically applies to property acquired before January 20, 2025, and placed in service during 2025.
On January 14, 2026, IRS issued Notice 2026-11, providing interim guidance on the changes made by OBBBA to the bonus depreciation rules. For the most part, the guidance directs taxpayers to look at the current rules, with slight modifications. Taxpayers can rely on the notice until regulations are issued.
In General
Generally, the Notice states that taxpayers can continue to use prior rules (Treas. Reg. §§ 1.168(k)-2 and 1.1502-68) to determine eligibility for bonus, with substitutions and modifications described in the Notice.
In determining whether depreciable property is acquired after January 19, 2025, for purposes of OBBBA, taxpayers can substitute “January 19, 2025” for “September 27, 2017” and “January 20, 2025” for “September 28, 2017” each time they appear in the existing rules.
Electing Out of Bonus
The Notice states that taxpayers will follow the same procedure they have been following if they wish to elect out of bonus depreciation altogether.
The taxpayer makes the election in the manner prescribed on Form 4562, “Depreciation and Amortization,” and its instructions. The instructions to the current Form 4562 generally provide that the taxpayer makes the election by attaching a statement to its timely filed Federal tax return (including extensions) for the taxable year in which the property at issue is placed in service, indicating the class of property for which the taxpayer is making the election and that, for such class, the taxpayer is not claiming additional first-year depreciation.
Electing Bonus for Trees and Vines
The TCJA provided that a taxpayer could make an election to deduct bonus depreciation for one or more specified plants in the ordinary course of the taxpayer’s farming business (§ 168(k)(5) election). If a taxpayer makes the § 168(k)(5) election, the additional first year depreciation deduction is allowable for the specified plant in the taxable year in which that plant was planted or grafted. The OBBBA allows a § 168(k)(5) election for 100 percent bonus depreciation for specified plants planted or grafted after January 19, 2025. The OBBBA also provides a choice to deduct 40 percent for plants planted or grafted during the first taxable year ending after January 19, 2025 (see below).
The Notice states that a taxpayer makes the § 168(k)(5) election by following rules and procedures consistent with the rules and procedures in Treas. Reg. § 1.168(k)-2(f). Generally that means that a taxpayer makes the 100 percent election by attaching a statement to the timely filed Federal tax return (including extensions) for the taxable year the taxpayer planted or grafted the specified plant to which the election applies indicating the taxpayer is electing to apply § 168(k)(5) and identifying the specified plant(s) for which the taxpayer is making the election.
Electing 40 Percent Bonus
OBBBA amended I.R.C. § 168(k)(10) to allow taxpayers to elect to deduct 40 percent (60 percent for certain property having longer production periods or certain aircraft), instead of 100 percent, for qualified property placed in service or plants planted or grafted, as applicable, by the taxpayer during the first taxable year ending after January 19, 2025.
This election must be made by the due date, including extensions, of the Federal tax return for the taxpayer's taxable year that includes January 20, 2025. If the 40 percent election is not timely made (and the taxpayer does not elect out of bonus), the taxpayer will take into account 100 percent bonus depreciation.
To make the election to take 40 percent bonus, the taxpayer attaches a statement to a timely filed return (including extensions) indicating they are electing to claim a 40 percent special depreciation allowance for all qualified property. Once made, the election cannot be revoked without IRS consent. The election must be made separately by each person owning qualified property (for example, by the partnership, by the S corporation, or for each member of a consolidated group by the common parent of the group).