|
IRS Issues Interim Guidance on OBBBA Amendments to Bonus Depreciation Deduction
(Parker Tax Publishing January 2026)
The IRS announced that it intends to issue proposed regulations to implement the additional first year depreciation deduction under Code Sec. 168(k), as amended by the One Big Beautiful Bill Act (Pub. L. 119-21) and provided interim guidance that addresses (1) property eligible for bonus depreciation; (2) elections under Code Sec. 168(k)(5) and (10); and (3) the addition of qualified sound recording productions to qualified property under Code Sec. 168(k)(2). Taxpayers may rely on the interim guidance before the proposed regulations are published. Notice 2026-11.
Background
Code Sec. 168(k)(1), as in effect after amendment by the Tax Cuts and Jobs Act (Pub. L. 115-97) (TCJA Code Sec. 168(k)), allows an additional first year depreciation deduction, based on the applicable percentage under TCJA Code Sec. 168(k)(6) for qualified property acquired after September 27, 2017, and placed in service before January 1, 2027 (January 1, 2028, for certain property having longer production periods and certain aircraft), and for specified plants planted or grafted after September 27, 2017, and before January 1, 2027, for which a Code Sec. 168(k)(5) election is made.
The applicable percentage under TCJA Code Sec. 168(k)(6) was 100 percent for qualified property placed in service, or specified plants planted or grafted, after September 27, 2017, and before January 1, 2023, and has phased down by 20 percentage points annually beginning with qualified property acquired after September 27, 2017, and placed in service after December 31, 2022 (December 31, 2023, for certain property having longer production periods or certain aircraft), and specified plants planted or grafted after December 31, 2022. Under TCJA Code Sec. 168(k)(6), the applicable percentage is (i) 40 percent for qualified property placed in service during 2025 (60 percent for certain property having longer production periods or certain aircraft) and (ii) 40 percent for specified plants planted or grafted during 2025.
OBBBA Amendments
Section 70301 of the OBBBA made several amendments to Code Sec. 168(k) to provide taxpayers with a permanent 100 percent additional first year depreciation deduction for qualified property acquired and placed in service, and specified plants planted or grafted, after January 19, 2025. Specifically, OBBBA Section 70301:
(1) removed the general requirement that qualified property must be placed in service, and specified plants must be planted or grafted, before January 1, 2027;
(2) removed the requirement that certain property having longer production periods or certain aircraft must be placed in service before January 1, 2028, and acquired before January 1, 2027;
(3) removed the provision specifying that the requirement that certain property having longer production periods and certain aircraft be acquired before January 1, 2027 is treated as met if the taxpayer begins manufacturing, constructing, or producing self-constructed property before January 1, 2027; and
(4) replaced the annual phasedown of the applicable percentage for the Code Sec. 168(k) additional first year depreciation deduction with a permanent 100 percent additional first year depreciation deduction for qualified property acquired, or specified plants planted or grafted, after January 19, 2025.
Additionally, OBBBA Section 70301 amended Code Sec. 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, additional first year depreciation for qualified property placed in service, or specified plants planted or grafted, during the first tax year ending after January 19, 2025.
OBBBA Section 70301(c) provides that the amendments made by OBBBA Section 70301 generally apply to property acquired, or specified plants planted or grafted, after January 19, 2025. OBBBA Section 70301(c)(4) contains language similar to Section 13201(h)(1) of the TCJA, stating that for purposes of the effective date in OBBBA Section 70301(c)(1), property is not treated as acquired after the date a written binding contract is entered into for such acquisition.
Code Sec. 181, as in effect prior to amendment by Section 70434 of the OBBBA (OBBBA Section 70434), allows taxpayers to elect to deduct up to $15 million of the aggregate production costs of any qualified film, television or live theatrical production commencing before January 1, 2026, but did not allow a deduction for sound recording productions. OBBBA Section 70434(a) and (b) amended Code Sec. 181(a) and (g) (redesignated as Code Sec. 181(h)) to allow taxpayers to deduct the cost of any qualified sound recording production, subject to a cap on the aggregate cost of any qualified sound recording production, or on the aggregate, cumulative cost of all such qualified sound recording productions in the tax year, of $150,000, for productions commencing before January 1, 2026, in tax years ending after July 4, 2025. Following the amendments by OBBBA Section 70434(e), Code Sec. 181(f) defines "qualified sound recording production" as a sound recording, as defined in 17 U.S.C. 101, produced and recorded in the United States.
OBBBA Section 70434(g) amended Code Sec. 168(k) by expanding the definition of qualified property in Code Sec. 168(k)(2) to include qualified sound recording productions for which a deduction would have been allowable under Code Sec. 181, without regard to Code Sec. 181(a)(2) and (h) (respectively, the limitation on deductible aggregate production costs and the termination date for Code Sec. 181) or Code Sec. 168(k). OBBBA Section 70434(g)(2) amended Code Sec. 168(k)(2)(H) to provide that a qualified sound recording production is considered placed in service at the time of the initial release or broadcast.
Under OBBBA Section 70434(i), the amendments to Code Secs. 168(k) and 181 made by OBBBA Section 70434 apply to sound recording productions commencing in tax years ending after July 4, 2025, the date of enactment of the OBBBA.
Notice 2026-11
On January 14, the IRS announced in Notice 2026-11 that it intends to issue proposed regulations that would implement the additional first year depreciation deduction under Code Sec. 168(k), as amended by Sections 70301 and 70434(g) of the OBBBA, including proposed regulations that would modify Reg. Sec. 1.168(k)-2 to include applicable qualified sound recording productions commencing in tax years ending after July 4, 2025.
Section 3 of Notice 2026-11 addresses property eligible for additional first year depreciation deduction under Code Sec. 168(k) as amended by the OBBBA. Section 4 addresses the elections under Code Sec. 168(k)(5) and (10). Section 5 addresses the addition of qualified sound recording productions to qualified property under Code Sec. 168(k)(2) for productions commencing in tax years ending after July 4, 2025. Section 6 addresses the expected applicability date of the forthcoming proposed regulations and the ability of taxpayers to rely on the interim guidance provided in Notice 2026-11 for property placed in service in tax years beginning before the date the forthcoming proposed regulations are published in the Federal Register.
Property Eligible for the Additional First Year Depreciation Deduction
In general, to determine whether depreciable property is qualified property eligible for the Code Sec. 168(k) additional first year depreciation deduction for property acquired, or specified plants planted or grafted, after January 19, 2025, and to determine the associated Code Sec. 168(k) additional first year depreciation deduction, a taxpayer applies rules consistent with the rules contained in Reg. Secs. 1.168(k)-2 and 1.1502-68, with the substitutions and modifications described in Notice 2026-11.
In determining whether depreciable property is acquired after January 19, 2025, for purposes of OBBBA Section 70301(c), taxpayers apply rules consistent with Reg. Secs. 1.168(k)-2(b)(5) and 1.1502-68(a) through (d), by substituting "January 19, 2025" for "September 27, 2017" each place it appears, and by substituting "January 20, 2025" for "September 28, 2017" each place it appears.
Because OBBBA Section 70301(a)(2)(A) removed the requirement under TCJA Code Sec. 168(k)(2)(B)(i)(III) and (C)(i) that certain long production period property must be acquired by the taxpayer (or acquired pursuant to a written binding contract entered into) before January 1, 2027, in order to be qualified property, Reg. Sec. 1.168(k)-2(d) (providing rules for determining if such qualified property is acquired before January 1, 2027) does not apply in determining whether such property is qualified property under Code Sec. 168(k), as amended by the OBBBA.
A taxpayer may make an election under rules consistent with Reg. Sec. 1.168(k)-2(c), by substituting "January 19, 2025" and "January 20, 2025" for "September 27, 2017" and "September 28, 2017", respectively, to treat an eligible component of an eligible larger self-constructed property as eligible for the additional first year depreciation deduction under Code Sec. 168(k), as amended by the OBBBA (component election). The eligible component must satisfy all the requirements set forth in Reg. Sec. 1.168(k)-2(c). A taxpayer makes the component election provided in Section 3.05(1) of Notice 2026-11 by following rules and procedures consistent with those described in Reg. Sec. 1.168(k)-2(c)(6).
Because OBBBA Section 70301(a) removed the Code Sec. 168(k)(2)(A)(iii), (B)(i)(II), (C)(i) and (k)(5)(A) requirements that qualified property must be placed in service before January 1, 2027 (January 1, 2028, for certain property having longer production periods and certain aircraft), and a specified plant must be planted, or grafted to a plant that has already been planted, before January 1, 2027, Reg. Sec. 1.168(k)-2(b)(4) (relating to placed-in-service dates) does not apply for purposes of determining whether depreciable property acquired, or plants planted or grafted (for which the taxpayer made the Code Sec. 168(k)(5) election), after January 19, 2025, is qualified property under Code Sec. 168(k).
In applying Code Sec. 168(k) to qualified property acquired, and specified plants planted or grafted (for which the taxpayer made the Code Sec. 168(k)(5) election), after January 19, 2025, substitute "100 percent" for "the applicable percentage" each place it appears in Reg. Sec. 1.168(k)-2, except for the examples provided in Reg. Sec. 1.168(k)-2(g)(2)(iv).
Code Sec. 168(k)(5) and (10) Elections
A taxpayer makes the Code Sec. 168(k)(5) election by following rules and procedures consistent with the rules and procedures in Reg. Sec. 1.168(k)2(f)(2). A taxpayer makes the Code Sec. 168(k)(10) election by following rules and procedures consistent with the rules and procedures in Reg. Sec. 1.168(k)2(f)(3), with the following modifications: (a) substitute "January 19, 2025" for "September 27, 2017" each place it appears, (b) substitute "January 20, 2025" for "September 28, 2017" each place it appears, (c) substitute "40 percent" ("60 percent" in the case of qualified property described in Code Sec. 168(k)(2)(B) or (C)) for "50 percent" each place it appears, and (d) substitute "applicable Form 4562, Depreciation and Amortization," for "2017 Form 4562, "Depreciation and Amortization."
Qualified Sounds Recording Productions
In applying Code Sec. 168(k) to a qualified sound recording production acquired before January 20, 2025, and in a tax year ending after July 4, 2025, a taxpayer applies Reg. Sec. 1.168(k)-2 by adding to the list of qualified property described in Reg. Sec. 1.168(k)-2(b)(2)(i) "a qualified sound recording production (as defined in Code Sec. 181(f)) for which a deduction would have been allowable under Code Sec. 181 without regard to Code Sec. 181(a)(2) or (h) or Sec. 168(k))."
A qualified sound recording production described in Code Sec. 168(k)(2)(A)(i)(VI), commencing in a tax year ending after July 4, 2025, and acquired, as determined under Section 5.03(1) of Notice 2026-11, after January 19, 2025, is qualified property eligible for the additional first year depreciation deduction under Code Sec. 168(k), as amended by the OBBBA. In determining when a qualified sound recording production is acquired for purposes of the effective date rules in OBBBA Section 70301(c), a qualified sound recording production is treated as acquired on the date that principal recording commences. For purposes of determining the additional first year depreciation deduction for a qualified sound recording production under Code Sec. 168(k), a qualified sound recording production is considered placed in service at the time of its initial release or broadcast under Code Sec. 168(k)(2)(H)(iii).
A taxpayer may make an election under Code Sec. 168(k)(7) not to deduct additional first year depreciation for a qualified sound recording production using rules and procedures consistent with the rules and procedures in Reg. Sec. 1.168(k)-2(f)(1), with the modification that the definition of class of property in Reg. Sec. 1.168(k)-2(f)(1)(ii) is expanded to include each separate production, defined using rules consistent with Reg. Sec. 1.181-3(b), of a qualified sound recording production.
Applicability Date and Reliance
The IRS anticipates that the forthcoming proposed regulations will propose rules consistent with the rules described in Sections 3 through 5 of Notice 2026-11 for property:
(1) that is placed in service in a tax year beginning on or after the date the final regulations are published in the Federal Register, and
(2) that is (i) depreciable property acquired by the taxpayer after January 19, 2025 (or, in the case of a qualified sound recording production, a production commencing in a tax year ending after July 4, 2025), (ii) specified plants for which taxpayers properly made the Code Sec. 168(k)(5) election that are planted, or grafted to a plant that was previously planted, after January 19, 2025, and (iii) components acquired or self-constructed after January 19, 2025, of larger self-constructed property described in Reg. Sec. 1.168(k)-2(c)(2), with the substituted dates in Section 3.05 of Notice 2026-11.
A taxpayer may rely on the guidance provided in Sections 3 through 5 of Notice 2026-11 for the property described in Section 6.01(b).that is placed in service in a tax year beginning before the date the forthcoming proposed regulations are published in the Federal Register, provided that the taxpayer follows the guidance in its entirety for all eligible property placed in service in such tax years, beginning with the first tax year with respect to which the taxpayer relies on the guidance provided in Sections 3 through 5 of Notice 2026-11.
For a discussion of property eligible for bonus depreciation, see Parker Tax ¶94,210. For a discussion of the elections under Code Sec. 168(k)(5) and (10), see Parker Tax ¶94,235. For a discussion of the deduction for qualified sound recording productions, see Parker Tax ¶95,617.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com
We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.
Try Our Easy, Powerful Search Engine
A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play
Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.
Dear Tax Professional,
My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.
Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.
To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.
Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.
Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!
Sincerely,
James Levey
Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com
|
