IRS Issues New Guidance to Benefit Businesses’ Capital Improvements

The IRS recently released new guidance confirming how businesses can take advantage of the return of 100 percent bonus depreciation beginning in 2026. IRS Notice 2026‑11, issued in January, explains how the bonus depreciation rules apply following the passage of the One Big Beautiful Bill Act, which permanently restored full first‑year expensing for qualifying business property.

This guidance is important for business owners planning equipment purchases, vehicle acquisitions, or facility improvements in 2026 and future years.

Background on Bonus Depreciation

Bonus depreciation allows businesses to deduct the cost of qualifying assets faster than under traditional depreciation schedules. Under prior law, bonus depreciation had been gradually phased down and was limited to 40 percent for property placed in service in 2025.

Recent legislation reversed that phase‑down and reinstated 100 percent bonus depreciation for qualified property acquired and placed in service after January 19, 2025. This is a major transformation of the Code to benefit businesses. Now businesses can expense in year 1, the entire cost of the purchase of capital assets that would have been previously subject to depreciation over many years, depending on the specific asset being placed in service. IRS Notice 2026‑11 confirms that taxpayers may rely on existing bonus depreciation regulations, updated solely to reflect the new effective dates, until formal regulations are issued.

Property That Qualifies for 100 Percent Bonus Depreciation

Qualifying property includes tangible business assets with relatively short recovery periods. Examples commonly relevant to business owners include machinery and equipment, manufacturing and construction assets, medical and dental equipment, office furniture, computers, servers, and other technology systems. For example, a commercial printing machine that previously would have been depreciated over 5 years can now be fully expensed in a single year; similarly, certain large industrial HVAC units or warehouse‑level systems that might have required 15 to 20 years of depreciation can now be written off immediately.

The guidance also confirms that certain heavy vehicles used primarily for business purposes may qualify. This includes assets such as earth‑moving trucks used in construction or heavy‑duty pickups, such as a Ford F‑150 or F‑250, when used more than 50 percent for business. In addition, interior improvements to non‑residential buildings that are classified as qualified improvement property may be eligible for full expensing even though the building itself is not. These improvements previously required a 15‑year depreciation period before being deductible in full.

Importantly, the IRS reaffirmed that both new and used property may qualify for bonus depreciation, provided the taxpayer did not previously use the property and the acquisition satisfies statutory requirements.

Property That Does Not Qualify

Certain assets remain excluded from bonus depreciation. Land is never depreciable and therefore cannot be expensed. Residential and commercial buildings must generally continue to be depreciated over 27.5 or 39 years, respectively, and do not qualify for accelerated depreciation as a whole.

However, specific components of buildings may still be eligible through qualified improvement property treatment or, in appropriate cases, cost‑segregation analysis. For example, interior lighting systems, interior wiring or piping, fire‑suppression systems, and interior HVAC components may qualify even though the building itself does not. Assets used primarily for personal purposes also remain ineligible.

Elections Available Under IRS Notice 2026‑11

IRS Notice 2026‑11 highlights several elections that give taxpayers flexibility in how they apply the bonus depreciation rules, depending on their income level and planning objectives.

For the first tax year ending after January 19, 2025, taxpayers may elect to claim a reduced bonus depreciation percentage rather than the full 100 percent. In most cases, this reduced rate is 40 percent, although a 60 percent rate may apply to certain long‑production‑period property and aircraft.

For example, a business that purchases $500,000 of qualifying equipment in 2026 would normally be eligible to deduct the full $500,000 in the year the equipment is placed in service. However, if the business expects significantly higher income in future years, it may choose to claim only 40 percent bonus depreciation in year one and recover the remaining cost over time. This approach can help smooth taxable income and avoid wasting deductions in a low‑income year.

Taxpayers may also elect to opt out of bonus depreciation entirely for a particular class of property. This election may be appropriate where traditional depreciation better aligns with long‑term income projections, financing covenants, or state tax considerations. Once made, the election applies to all assets within that class placed in service during the year.

Interaction with Section 179 Expensing

Bonus depreciation often operates alongside Section 179 expensing, another provision that allows businesses to immediately deduct the cost of certain capital assets. Section 179 is designed primarily for small and medium‑sized businesses and allows qualifying property to be expensed in the year it is placed in service, subject to annual dollar limits and business‑income restrictions.

Unlike bonus depreciation, Section 179 cannot create a tax loss. Deductions under Section 179 are limited to the amount of taxable business income for the year, and unused amounts generally carry forward. Bonus depreciation, by contrast, has no dollar cap and may generate losses that can be carried forward to future years.

For example, assume a business purchases $800,000 of qualifying equipment in 2026 and has $600,000 of taxable business income. The business may elect to expense $600,000 under Section 179, fully offsetting current‑year income. The remaining $200,000 basis may then be deducted using bonus depreciation, even though it creates a net operating loss. That loss may be carried forward to offset income in future years.

Planning Considerations for Business Owners

The restoration of full bonus depreciation significantly affects capital‑investment planning for businesses. To qualify, assets must be placed in service during the tax year, not merely purchased or paid for. The timing of acquisitions can materially affect current‑year tax liability, and elections should be coordinated with broader income and cash‑flow objectives.

Conclusion

IRS Notice 2026‑11 confirms that 100 percent bonus depreciation is once again available and permanent for qualifying assets placed in service in 2026 and beyond. For many businesses, the ability to fully expense capital investments in the first year presents a meaningful opportunity to reduce tax liability and reinvest in growth. Proper classification, timing, and election planning remain essential to maximizing the benefit.

For further inquiries or questions, please contact fportera@lavellelaw.com or aletto@lavellelaw.com or (847) 705-7555.