The enactment of Public Law 119-21, 139 Stat. 72, known as the One, Big, Beautiful Bill Act (OBBBA), on July 4, 2025, represents a significant shift in the federal tax treatment of capital expenditures. For tax practitioners, the primary vehicle for understanding the administrative implementation of these changes is Notice 2026-11, which provides interim guidance on the additional first-year depreciation deduction under Internal Revenue Code Section 168(k). This analysis examines the statutory modifications, the IRS’s technical substitutions for existing regulations, and the specific treatment of newly eligible asset classes through the lens of strict statutory construction.

Legislative Intent and Statutory Framework of the OBBBA Amendments

The OBBBA fundamentally altered the trajectory of cost recovery established by the Tax Cuts and Jobs Act (TCJA) of 2017. Prior to the OBBBA, Section 168(k) featured an "annual phasedown of the applicable percentage," which was scheduled to drop to 40 percent for property placed in service during 2025. Section 70301 of the OBBBA effectively arrested this decline by providing "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".

Under strict construction of the new law, several prior constraints have been repealed. Specifically, the OBBBA "removed the general requirement that qualified property must be placed in service... before January 1, 2027" and likewise eliminated the requirement that property with longer production periods or certain aircraft be placed in service before January 1, 2028. Furthermore, the legislature "replaced the annual phasedown of the applicable percentage... with a permanent 100 percent additional first year depreciation deduction" for property acquired or specified plants planted/grafted after the January 19, 2025, threshold.

Technical Application and Regulatory Substitutions

Notice 2026-11 serves as a bridge between the TCJA-era regulations and the forthcoming proposed regulations necessitated by the OBBBA. The IRS has instructed practitioners to apply existing rules under Treasury Regulation Sections 1.168(k)-2 and 1.1502-68, but with critical "substitutions and modifications".

For the acquisition date requirement, the Notice mandates that taxpayers determine eligibility for the permanent 100 percent deduction "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". This substitution is vital for determining whether property falls under the new permanent regime or the prior TCJA phasedown. The Notice emphasizes that the statutory construction remains consistent with prior law regarding contractual obligations: "property is not treated as acquired after the date a written binding contract is entered into for such acquisition".

Regarding the applicable percentage, for qualified property acquired or specified plants planted after January 19, 2025, the Notice directs taxpayers to "substitute '100 percent' for 'the applicable percentage' each place it appears in § 1.168(k)-2". This effectively streamlines the calculation of bonus depreciation by bypassing the previous phasedown tables.

Inclusion of Qualified Sound Recording Productions

A technical expansion of the Section 168(k) regime under OBBBA Section 70434 involves the inclusion of "qualified sound recording productions". This was achieved by amending Section 181 to allow deductions for sound recordings and subsequently amending Section 168(k)(2) to expand the definition of "qualified property".

The Notice provides specific interim guidance for these assets, stating that a qualified sound recording production is "considered placed in service at the time of the initial release or broadcast". For the purpose of determining the acquisition date, the IRS has ruled that such a production "is treated as acquired on the date that principal recording commences". This mirrors the long-standing treatment of qualified film and television productions.

Election Mechanisms and Procedural Compliance

The Notice clarifies the status of several critical elections under the revised Section 168(k).

The Section 168(k)(5) election for specified plants remains available, but with the OBBBA having "removed the applicable percentage phase down in § 168(k)(6)" and "adding a permanent 100 percent additional first year depreciation deduction" for plants for which the election is made.

A unique transitional mechanism is found in the Section 168(k)(10) election. The OBBBA amended this section 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" for property placed in service during the "first taxable year ending after January 19, 2025". To make this election, the Notice requires taxpayers to follow procedures consistent with current regulations while substituting the new statutory dates and percentages.

Additionally, the Section 168(k)(7) election—the election not to deduct additional first-year depreciation—continues to apply. For sound recordings, the definition of the "class of property" for this election is now "expanded to include each separate production".

Future Regulations and Taxpayer Reliance Standards

The Treasury and IRS have signaled that forthcoming proposed regulations will formally codify these changes, including the modifications to Section 1.168(k)-2 to incorporate sound recordings commencing in taxable years ending after July 4, 2025.

Taxpayers are granted the right to rely on the interim guidance in Notice 2026-11 for property placed in service in taxable years beginning before the publication of the forthcoming proposed regulations. However, this reliance is subject to a strict consistency requirement: the taxpayer must follow the guidance "in its entirety for all eligible property placed in service in such taxable years". The IRS anticipates that the final regulations will apply to property placed in service in taxable years beginning on or after the date of their publication in the Federal Register.

Practitioners should note that while the IRS intends the proposed regulations to be "consistent with the interim guidance provided in sections 3 through 5" of the Notice, the formal regulatory process may introduce additional technical refinements. Until such time, the "substitutions and modifications" outlined in the Notice constitute the primary authority for applying Section 168(k) in its post-OBBBA form.

Prepared with assistance from NotebookLM.