Return of Component Election for Bonus Depreciation Creates Significant Tax Savings for Self-Constructed Projects
Taxpayers who started construction on any project prior to the 100% Bonus Depreciation change on January 20, 2025, may be left with 40% Bonus Depreciation, unless a new election is filed.
On January 14, 2026, IRS issued Notice 2026-11 providing interim administrative guidance under the One Big Beautiful Bill Act (OBBBA). The notice can provide a significant tax savings opportunity for taxpayers constructing property that carried over into 2025.
The component election allows eligible taxpayers to claim 100% Bonus Depreciation on individual components of larger self-constructed assets, even if construction on the overall project began before January 20, 2025. This means developers with long lead-time projects can allocate eligible systems like special-purpose electrical systems, removable flooring, or cabinetry and apply 100% Bonus Depreciation under the new rules. With proper planning, this election could yield significant tax benefits.
For self-constructed property, there is a 10% safe harbor test that determines whether the project is treated as having begun before the new 100% Bonus Depreciation effective date. If, before January 20, 2025, you have paid or incurred more than 10% of the project’s total cost (i.e., excluding land and preliminary activities like planning/design and financing), the project is treated as acquired under the pre-OBBBA rules, meaning the entire eligible basis is generally limited to the 40% Bonus Depreciation rate for property placed in service in 2025. For eligible taxpayers in this situation, the component election affords a significant tax advantage .
This notice resembles similar guidance from the last time Bonus Depreciation changed. The component election allows taxpayers to claim 100% Bonus Depreciation on specific components (i.e., 3-year, 5-year, 7-year, & 15-year items found in a Cost Segregation study) that are part of a larger self-constructed property, even if construction began before January 20, 2025, pre-OBBBA.
To make the election, taxpayers must attach a statement to their timely filed return (i.e., including extensions) and specify whether the election applies to all or some components.
Cost Segregation studies for self-constructed buildings can be maximized beyond just the typical 3-5-, 7-, and 15-year allocations by allocating components completed before and after Jan. 19, 2025. For example, you might see pre-Jan. 19 electrical costs and post-Jan. 20 electrical costs.
Instead of having to depreciate the entire eligible cost of your new construction project with 40% Bonus Depreciation, you can take advantage of 100% bonus on a portion of it.
To understand how the component election could impact your current or future developments, contact your SAX Advisor for a complimentary consultation as to your project eligibility.
The complete scope and application of IRS Notice 2026-11 can be referenced here.