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The IRS on Jan. 14 issued interim guidance (Notice 2026‑11) (PDF - 156 KB) addressing the revival of the first‑year depreciation deduction under Section 168(k), as amended by the 2025 tax law, known as the One Big Beautiful Bill Act (OBBBA).
The notice provides that Section 168(k) will generally continue to apply consistent with prior tax years except:
- The bonus depreciation deduction is set indefinitely set at 100%.
- Qualified property must be acquired and placed in service after Jan. 19, 2025, to be eligible for the deduction.
- Qualified sound recording productions are now eligible for the deduction.
As enacted under the 2017 Tax Cuts and Jobs Act (TCJA), Section 168(k) allowed a first‑year “bonus” depreciation deduction based on an “applicable percentage” for qualified property acquired after Sept. 27, 2017, and placed in service before Jan. 1, 2027. The applicable percentage was 100% for qualified property placed in service after Sept. 27, 2017, and before Jan. 1, 2023, and it phased down by 20 percentage points annually for property placed in service after Dec. 31, 2022.
Under Section 168(k)(6), the applicable percentage for qualified property placed in service during 2025 was 40%. The OBBBA amended Section 168(k) to permanently set the additional first‑year depreciation deduction at 100% for property acquired and placed in service after Jan. 19, 2025.
To determine whether depreciable property is eligible for bonus depreciation, the new notice indicates that the IRS will propose regulations consistent with Treas. Reg. Section 1.168(k)-2, with a few modifications:
- Substituting Jan. 19, 2025, for Sept. 27, 2017, in each place it appears.
- Substituting Jan. 20, 2025, for Sept. 28, 2017, in each place it appears.
- Minor changes for language around elections in Section 168(k).
- Inclusion of qualified sound recording productions in the list of bonus-eligible property.
Taxpayers may continue to make several elections under Section 168(k):
- Section 168(k)(5) elections allow taxpayers to take bonus depreciation on plants planted or grafted after Jan. 19, 2025, by a taxpayer in the ordinary course of the taxpayer’s farming business.
- Section 168(k)(7) elections allow taxpayers to elect out of bonus depreciation for any class of qualified property.
- Section 168(k)(10) elections under the OBBBA will allow taxpayers to claim 40% bonus depreciation for property acquired after Jan. 19, 2025, and placed in service in a taxable year that includes Jan. 20, 2025.
Grant Thornton insight:
This notice provides clarity for capital-intensive businesses and may influence the timing of acquisitions, particularly for taxpayers contemplating large-scale equipment or infrastructure investments.
However, taxpayers should carefully consider the effects on other provisions, such as Section 163(j) interest limitations. For example, while for a calendar-year taxpayer the timing of 100% bonus depreciation will generally match the Section 163(j) interest expense limitation shift back to tax-basis EBITDA, fiscal year taxpayers may still be subject to the more restrictive EBIT limitation for their taxable year beginning in 2024 and ending in 2025, which reduces the benefit of 100% bonus and may encourage one or more elections to defer depreciation into future years.
Section 181, as enacted under the TCJA, allowed taxpayers to deduct up to $15 million of production costs for qualified film, television, or live theatrical productions incurred before Jan. 1, 2026, but excluded sound recording productions. The OBBBA expanded Section 181 to allow a deduction of up to $150,000 for qualified sound recording productions such as music recordings, streaming audio series, music videos and concert films produced and recorded in the U.S.
Qualified sound recording productions placed in service after Jan. 19, 2025, also qualify for bonus depreciation and are treated as placed in service upon initial release or broadcast. Taxpayers may elect out of bonus depreciation for these productions under Section 168(k)(7).
Section 181 benefits do not apply to qualified productions commencing after Dec. 31, 2025.
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