IRS Notice 2026-11 Bonus Depreciation Election Guide

By Adham Abadier, CPA — California CPA License #158599

If your business placed equipment, machinery, vehicles, or other qualifying assets into service during 2025, you are facing one of the most consequential elections on your 2025 business tax return right now: do you claim the new 100% bonus depreciation restored by the One Big Beautiful Bill Act (OBBBA), or do you elect to stick with the old 40% TCJA rate that would have applied before the law changed? That exact question is precisely what the IRS Notice 2026-11 bonus depreciation election — issued January 14, 2026 — is designed to answer. This guide breaks down the mechanics of the election, who benefits from each choice, and the California nonconformity wrinkle that every Inland Empire business owner must understand before filing that 2025 return.

What Is IRS Notice 2026-11 and the Bonus Depreciation Election?

On January 14, 2026, the Treasury Department and IRS published Notice 2026-11, formally titled Interim Guidance on Additional First Year Depreciation Deduction under Section 168(k). The notice was prompted by the passage of the One Big Beautiful Bill Act (Public Law 119-21, the OBBBA), which permanently restored 100% first-year bonus depreciation under IRC Section 168(k) for qualified property acquired and placed in service after January 19, 2025.

The existing Treasury Regulations under Section 1.168(k) were written for the old TCJA phase-down schedule — 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and 0% in 2027. Those regulations remain the operative framework; Notice 2026-11 simply substitutes the new OBBBA dates and confirms taxpayers can rely on the old regulatory structure with updated date references until new regulations are finalized. In plain terms: the IRS is telling you exactly which rules govern your 2025 tax return and what elections are available. For the full text, see the official guidance at IRS.gov.

The Core Rule: 100% OBBBA vs. 40% TCJA Bonus Depreciation

Here is the baseline rule clarified by the IRS Notice 2026-11 bonus depreciation election framework:

• Property acquired AND placed in service after January 19, 2025: Eligible for 100% bonus depreciation under the OBBBA — the new default rate.
• Property acquired before January 20, 2025 (or subject to a binding contract before that date): Subject to the old TCJA rates — 40% for most five-year and seven-year property placed in service in calendar year 2025.

Both the acquisition date and the placed-in-service date matter. If you signed a binding contract for equipment on January 10, 2025, and it was delivered on February 15, 2025, that asset follows the old 40% TCJA rules because the acquisition predates January 20, 2025.

Notice 2026-11 also clarifies the component election: for large self-constructed projects — a manufacturing facility, a major tenant improvement — components acquired or self-constructed after January 19, 2025 can qualify for 100% bonus depreciation even if the larger project started before that date. This is a meaningful planning opportunity for Inland Empire construction, warehousing, and manufacturing businesses adding onto existing facilities. Explore how proactive tax planning can optimize your depreciation strategy across multiple years.

The Election: Choosing 40% Instead of 100% Bonus Depreciation

This is the heart of the IRS Notice 2026-11 bonus depreciation election — the decision that matters most for your 2025 return right now. Under IRC Section 168(k)(7), as applied through Notice 2026-11, taxpayers can elect out of the new 100% OBBBA rate for any entire class of qualified property placed in service during the first tax year ending after January 19, 2025. For calendar-year filers, that is the 2025 tax year. If you make this election, the property reverts to the TCJA bonus depreciation rates applicable to that year — generally 40% for five-year and seven-year property in 2025.

A separate election under IRC Section 168(k)(5) is also available for specified plants — orchards, vineyards, and similar agricultural property — to apply 100% bonus depreciation in the year of planting or grafting rather than the placed-in-service year.

Why Would a Business Choose 40% Over 100% Bonus Depreciation?

At first glance, 100% immediate expensing seems like an obvious win — but there are real, common scenarios where electing the lower 40% rate makes more sense for your 2025 business tax return.

1. You Are Already in a Net Operating Loss (NOL)

If your business is already projecting a 2025 tax loss, piling on 100% bonus depreciation only creates a larger NOL carryforward. Under current law, NOLs are limited to 80% of taxable income in the year they are used. Spreading the deduction over multiple years via the 40% rate and regular MACRS depreciation may put actual dollars in your pocket sooner.

2. You Expect Significantly Higher Income in Future Years

If your income is unusually low in 2025 — a launch year, a major renovation, a lost contract — but you expect 2026 and 2027 income to be substantially higher, keeping some depreciation in the pipeline for future years has real value. A deduction saved for a 37% bracket year is worth more than one used in a 22% bracket year. This is a core reason to engage year-round tax planning strategy rather than making the election in isolation.

3. The Section 199A QBI Deduction Interaction

The Section 199A QBI deduction (recently expanded to 23% under the OBBBA) is limited to 20%/23% of your qualified business income. If 100% bonus depreciation wipes out your QBI entirely, it also eliminates your QBI deduction — a second deduction layered on top of the first. In some cases the combined loss of the QBI deduction makes the 100% election a net loser compared to the 40% election.

4. California State Tax Planning and the Add-Back Problem

This is especially relevant for Inland Empire and Southern California businesses, and we cover it in depth in its own section below. California’s nonconformity with OBBBA bonus depreciation creates a mandatory state add-back that partially or fully offsets federal savings in many situations.

Real-World Example: An Eastvale HVAC Contractor

Consider ThermalEdge Services LLC — a hypothetical multi-member LLC operating as an HVAC contractor based in Eastvale, California. ThermalEdge files Form 1065 (a partnership return) and issues Schedule K-1s to its two equal partners. In 2025, the company purchased two service vans and a diagnostic workstation — all acquired and placed in service after January 19, 2025 — with a combined depreciable cost of $120,000. Net ordinary income before depreciation: $210,000.

Note: This example is simplified for illustration. Actual results depend on your specific facts, MACRS asset class, state tax rate, self-employment income structure, and other deductions. Always work with a licensed CPA. Learn more about our business tax return preparation services.

The California Problem: No Conformity, Big Bonus Depreciation Consequences

Here is the issue every California small business owner must understand before finalizing the IRS Notice 2026-11 bonus depreciation election: California does not conform to the OBBBA’s 100% bonus depreciation. The California Franchise Tax Board has historically been selective about adopting federal tax law changes, and the OBBBA is no exception.

In practice: if ThermalEdge LLC claims $120,000 in federal 100% bonus depreciation, it must add back that entire $120,000 to California taxable income and instead depreciate the assets over their standard MACRS recovery periods for state purposes. The result is a large federal-state depreciation book difference that must be tracked every year until California depreciation catches up.

For an S-corporation or LLC filing California Form 100S or 565, this requires maintaining separate depreciation schedules — one for federal, one for California. If your books do not already maintain separate federal and state depreciation records, this creates a significant cleanup problem. This is one reason why California businesses making large federal bonus depreciation elections frequently need a QuickBooks cleanup or reconciliation after filing season — the two sets of books diverge significantly and must be reconciled before the following year’s estimated tax payments can be accurately calculated.

California nonconformity does not mean you should automatically avoid the federal 100% election — it means you must model both the federal and California tax impact together before deciding. For Inland Empire businesses with high California taxable income, the state add-back can offset a meaningful portion of the federal savings. Our Moreno Valley tax accountant team handles exactly this dual-jurisdiction modeling for clients across the region.

How to Make the IRS Notice 2026-11 Bonus Depreciation Election on Your 2025 Return

According to Notice 2026-11 and the Section 1.168(k) regulations it incorporates by reference, here is how the election is actually executed:

For Corporations (Form 1120 or 1120-S)

Attach a statement to your timely filed return identifying: (1) the class of property for which you are electing out, (2) the tax year to which the election applies, and (3) a declaration that the taxpayer is electing out of 100% OBBBA bonus depreciation for that class under IRC Section 168(k)(7). Complete Form 4562 (Depreciation and Amortization) using the elected percentage.

For Partnerships and LLCs (Form 1065)

The election is made at the entity level — the partnership or LLC makes the election, not the individual partners. Coordinating with all partners before filing is essential. The elected depreciation amount flows to each partner’s Schedule K-1. For professional guidance on partnership return preparation, see our business tax return services.

For Sole Proprietors and Single-Member LLCs (Schedule C)

The election is reported on Form 4562, Part II, with the appropriate notation. The same attachment requirements apply.

Special Rule: Property Acquired Before January 20, 2025

Notice 2026-11 also addresses a common real-world scenario: what if you signed a contract or started construction before January 20, 2025, but the property was not placed in service until mid-2025?

If a binding written contract existed before January 20, 2025, the property is treated as acquired under the old TCJA rules — only the 40% rate applies, and no election to claim 100% is available for that asset. This catches many business owners off guard, particularly those who signed equipment purchase agreements or construction contracts in late 2024 expecting 2025 delivery.

For self-constructed property, the Notice applies the existing physical work test and 10% safe harbor — if significant physical work had begun or more than 10% of the total cost had been incurred before January 20, 2025, the property is treated as acquired before that date and the 40% rate applies.

Who Should Get CPA Help Before Making the Bonus Depreciation Election

The IRS Notice 2026-11 bonus depreciation election is not a one-size-fits-all decision. Professional guidance is particularly important if:

• You have mixed property — some assets acquired before January 20, 2025 (40% rate) and some after (100% available). The class-by-class mechanics can be complex.
• You operate as an S-corp or partnership — the entity-level election affects all owners’ K-1s, and all partners must be consulted before filing.
• You operate in California — the nonconformity analysis is mandatory; federal savings must be weighed against the California add-back.
• You have significant NOL carryforwards or credits — 100% depreciation may generate or enlarge an NOL subject to the 80% limitation.
• You are planning a large asset purchase in 2026 — your 2025 election should be modeled alongside anticipated 2026 purchases to optimize across both years.
• You run an agricultural operation — the specified plant election under Section 168(k)(5) has its own timing requirements under Notice 2026-11.

The AICPA consistently emphasizes that depreciation elections with multi-year consequences should be reviewed by a licensed CPA before filing — particularly in states with nonconformity issues like California.

2025 Bonus Depreciation Action Checklist for Inland Empire Businesses

If your 2025 return has not been filed yet — or if you extended — here is what to do right now:

1. Pull your complete asset list. Identify every asset placed in service in 2025 and confirm whether each was acquired before or after January 20, 2025.
2. Check for binding contracts. Any signed purchase agreement dated before January 20, 2025 triggers the old 40% TCJA rules regardless of delivery date.
3. Run both federal scenarios. Model the tax impact of 100% vs. 40% bonus depreciation under Notice 2026-11 at the federal level.
4. Layer in the California add-back. Add back all federal bonus depreciation to California income and compare the combined federal + state tax under each scenario.
5. Check your QBI deduction. Confirm that 100% bonus depreciation does not eliminate qualified business income and cost you the Section 199A deduction.
6. Review your books. Ensure your bookkeeping system maintains separate federal and California depreciation records. If it does not, schedule a QuickBooks cleanup before filing.
7. Talk to your CPA before filing. The election is irrevocable. A 30-minute conversation can prevent a multi-year mistake.

Frequently Asked Questions: IRS Notice 2026-11 Bonus Depreciation Election