IRS Notice 2026-11: Interim Guidance on Amended Section 168(k)
IRS Notice 2026-11, issued January 14, 2026, provides interim guidance on amended Section 168(k) under Public Law 119-21 (OBBBA). The Notice defines a binding contract for the January 19, 2025 cliff, clarifies the Section 168(k)(10) 40% election mechanics, addresses the used property five-year lookback, and covers transition rules between the phase-down and permanent 100% regimes.
Binding contract definition
Notice 2026-11 defines a binding contract as a contract enforceable under applicable state law against the taxpayer, with no material conditions outside the taxpayer's control that would permit avoidance. Letters of intent, purchase options not yet exercised, and contracts subject to material buyer-control contingencies do not qualify.
Reasonable closing conditions (financing, inspection, title clearance) do not disqualify a contract from binding status. The substance-over-form test applies: a back-dated contract with clearly post-cliff intent may be treated as post-cliff for OBBBA purposes.
Section 168(k)(10) 40% election mechanics
The 40% election under Section 168(k)(10) is made by attaching a statement to the return for the first tax year ending after January 19, 2025. The statement identifies the elected property classes, the election under Section 168(k)(10), and the elected rate (40% for standard property, 60% for long-production-period property).
The election applies on a class-by-class basis. A taxpayer can elect 40% on one class (e.g., 5-year personal property) while taking 100% on another (e.g., 15-year land improvements). The election is irrevocable for the year.
Used property five-year lookback
Notice 2026-11 clarifies the used property lookback under Section 168(k)(2)(E)(ii). Property qualifies as used for bonus depreciation if the taxpayer (or a related party) did not own the property or a substantially identical interest in the previous five years.
Related party is defined by reference to IRC Sections 267 and 707. Substantially identical means functionally equivalent property. The lookback covers the five years ending on the acquisition date.
Transition rules
Property under a binding contract on or before January 19, 2025 with a placed-in-service date after January 19, 2025 stays on the phase-down regime. The Notice confirms this rule: 40% bonus for 2025 placed-in-service, 20% for 2026, 0% for 2027 and later, regardless of when in 2025 the property was actually placed in service.
Long-production-period property has a one-year extension of each phase-down rate: 60% in 2025, 40% in 2026, 20% in 2027, 0% in 2028. Self-constructed property and contracts requiring more than two years to complete typically qualify as long-production-period under Section 168(k)(2)(B).
Frequently asked questions
- How does WeCostSeg coordinate with my CPA?
- Every engagement follows the three-touch CPA Coordination Protocol. We send a preliminary analysis to your CPA on intake, share the draft report five business days before final delivery, and coordinate Form 3115 filing timing when a Section 481(a) adjustment applies. Your CPA never pays a fee.
- Does this analysis assume 100% bonus depreciation under OBBBA?
- Yes for property acquired with a binding contract on or after January 20, 2025 under Public Law 119-21. Property under a binding contract on or before January 19, 2025 stays on the legacy phase-down: 40% bonus in 2025, 20% in 2026, 0% in 2027 and after.
- Is the five-year audit defense included?
- Yes. Every WeCostSeg engagement includes five years of written audit defense at no extra cost. The defense aligns to the 13 Principal Elements of a Quality Cost Segregation Study under IRS Publication 5653 Chapter 4.
- Can I get a free preliminary analysis?
- Yes. Submit your property details via the free proposal form or WhatsApp. Our engineer returns a written estimate of your first-year deduction within four business hours during US Eastern hours. No payment, no contract.
- Where can I read Notice 2026-11?
- The Notice is published at irs.gov in the Notice 2026-11 reference. The IRS posts notices and revenue procedures at the IRS website Office of Chief Counsel publications page.
Zawwad Ul Sami, Founder
Zawwad Ul Sami is the founder of WeCostSeg, a founder-led cost segregation firm serving real estate investors across the US. He focuses on strategy, pricing, and the firm's overall direction.