Taxpayers who initiated construction projects prior to the reinstatement of 100% Bonus Depreciation on January 20, 2025, may believe they are irrevocably limited to 40% bonus depreciation for property placed in service during 2025. This assumption is frequently incorrect.
On January 14, 2026, the IRS published Notice 2026-11, providing interim guidance pursuant to the One Big Beautiful Bill Act (“OBBBA”). This notice introduces a component-level election with the potential to substantially alter depreciation outcomes for self-constructed assets—particularly those involved in extensive, multi-year developments continuing into 2025. For eligible taxpayers, this election facilitates significant immediate deductions—even when a project otherwise qualifies as “pre-OBBBA.”
The Challenge: 10% Safe Harbor Restricts Many Projects to 40% Bonus Depreciation
Under established IRS regulations for self-constructed property, a project is deemed to have commenced once more than 10% of total project costs (excluding land and specified preliminary activities such as design, engineering, and financing) have been paid or incurred. If this 10% threshold was exceeded before January 20, 2025, the project generally adheres to pre-OBBBA bonus depreciation rates: 40% for qualifying property placed in service in 2025
For large-scale developments, including multifamily, industrial, hospitality, data center, or mixed-use properties this rule can delay tax recovery significantly, even in cases where the bulk of physical construction occurred after January 20, 2025.
The Solution: Component Election Introduced in IRS Notice 2026-11
IRS Notice 2026-11 establishes a component election, permitting taxpayers to apply 100% Bonus Depreciation to individual components of a self-constructed asset, regardless of whether overall project construction began before January 20, 2025.
This approach allows for a nuanced application, rather than treating the entirety of a project under a uniform regime.
Eligible components typically identified via a comprehensive Cost Segregation study may qualify for full expensing, including:
- Special-purpose electrical and power distribution systems
- Removable or raised flooring
- Dedicated HVAC systems designed for specific equipment or processes
- Millwork, cabinetry, and specialty finishes
- Site utilities and certain exterior improvements (i.e., 15-year property)
These items, generally categorized as 5-year or 15-year property, are eligible for 100% bonus depreciation when they comply with the post-January 19, 2025 acquisition standard, even if incorporated within a larger self-constructed facility.
Strategic Planning for Developers and Owner-Builders
The component election reflects principles established in earlier bonus depreciation transitions, reinforcing that depreciation is determined by component details rather than project milestones.
Proper documentation enables taxpayers to:
- Distinguish costs incurred before versus after January 19, 2025
- Apply differential treatment to identical systems (e.g., electrical), depending on installation dates
- Maintain compliance while optimizing tax benefits
Common scenarios include:
- Electrical or mechanical systems partially installed both before and after January 19, 2025
- Phased delivery of FF&E or specialized infrastructure according to tenant or equipment schedules
Each of these circumstances can materially impact eligibility for bonus depreciation.
Election Procedures: Steps for Taxpayers
To utilize the component election, taxpayers are required to:
- Attach an election statement to a timely filed federal tax return (including extensions)
- Specify whether the election pertains to all eligible components or select items only
- Maintain detailed, engineering-grade cost documentation substantiating component identification and placed-in-service timing
This process requires thorough substantiation consistent with Cost Segregation and capitalization standards; it is not simply a routine election.
Conclusion
Taxpayers engaged in self-constructed projects extending into 2025 are not necessarily restricted to the 40% Bonus Depreciation rate. With IRS Notice 2026-11, many long-term construction projects now have renewed access, at least in part, to 100% Bonus Depreciation. The pivotal factor is component-level analysis rather than treating the entire project as a single asset.
Specialty Tax Advisors view this guidance as a significant opportunity for bonus depreciation planning under OBBBA. When paired with a robust Cost Segregation study, the component election can substantially accelerate tax deductions while ensuring compliance with IRS requirements.
If you wish to determine how much of your project may still qualify for 100% Bonus Depreciation, Specialty Tax Advisors has completed over 10,000 Cost Segregation studies, delivering more than $1 billion in cumulative tax savings for property owners across the United States. To schedule a complimentary discovery call to properly scope your construction project please contact us at