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March 12, 2026

Contributors: Anthony J. Licavoli Jr., CPA, Mike Armstrong, EA, CCSP

The BasicsÌý

• AÌýcostÌýsegregationÌýstudy is an engineering-based analysis that allows commercial property owners to accelerate depreciation by reclassifying building components.
• By moving assets from a 39-year life to 5-, 7-, or 15-year lives, businesses significantly increase immediate cash flow and reduce current tax liability.
• The OBBB’s restoration of 100% bonus depreciation makes cost segregation more valuable than everÌýwhenÌýpaired with new QPP provisions for manufacturing facilities.

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Reclassifying Assets forÌýTax SavingsÌý

For tax purposes, a building isn’t a single, indivisible asset. It’s an integrated set of systems with different functions and useful lives. While commercial real estate is typically depreciated over 39 years (and residential rental property over 27.5 years), many individual components qualify as shorter-lived assets, enabling the owner to write off those components faster than the main structure.Ìý

IdentifyingÌýthe specific building components that qualify for shorter depreciation periodsÌýthan the standard 27.5 or 39 yearsÌýis notÌýa matter ofÌýestimation; it requires a cost segregation study.Ìý

Cost Segregation StudiesÌýExplained

A cost segregation study employs a “building-to-blueprint” engineering approach to dissect these costs,ÌýidentifyingÌýassets that qualify asÌýpersonal propertyÌýor land improvements rather than real property.

This processÌýinvolves a detailedÌýsiteÌýphysical inspection and a review of blueprints, contractor invoices, and ALTA surveys. By peelingÌýbackÌýthe layers of a facility, engineers can isolate componentsÌý—Ìýsuch as decorative finishes, specialized electrical distribution, and exterior site workÌý—Ìýthat the IRS allows to be depreciated over much shorter 5, 7, or 15-year recovery periods.Ìý

The technical depth of a study lies in distinguishing “structural components” from “tangible personal property.” While a wall is typically a 39-year asset, a wall that is removable or specifically designed to support a production process may be reclassified. Engineers look for “secondary” systems,Ìýsuch as theÌýportionÌýof the electrical system that powers a specific piece of equipment,Ìýrather than the general building lighting.ÌýÌý

By quantifying these specific costs through engineering take-offs and unit-cost estimation,Ìýa taxpayer canÌýtransition a significant percentage of theÌýbuilding’sÌýcost from a multi-decade recovery period into a short-term tax benefit.Ìý

The 100% Bonus MultiplierÌýÌý

The value of this reclassification has been exponentially increased by the One Big Beautiful Bill (OBBB). By restoring 100% bonus depreciation for assets with a recovery period of 20 years or less, the OBBB allows taxpayers to write off the entire cost of these reclassified components in the very first year.Ìý

Without a cost segregation study, these itemsÌýremainÌýburied in the 39-year building “macro-asset.”ÌýWith a study,Ìýthey are pulled into the 100% bonus-eligible category,ÌýcreatingÌýÌýaverageÌýdeductions of $50,000–$260,000 for every $1,000,000Ìýin buildingÌýbasis,ÌýwhichÌýcanÌýresult in aÌýmassive, immediate tax shield.Ìý

Sector Insights: Maximizing Cash Flow Across Different Property Types

Dissecting costs yields different levels of benefit depending on a property’s use and its specialized internal systems. The following examples illustrate how common assets in various sectors may be reclassified to accelerate depreciation and improve cash flow. Key industries primed for cost segregation benefits this year include:

Healthcare: Medical facilities require intricate, specialized systems to support patient care and diagnostic technology.Ìý

• Examples: Oxygen andÌýotherÌýmedical gas piping, lead-lined walls for X-rayÌýsuites,ÌýÌýspecialtyÌýlightingÌýused in the healthcare profession, and specialized laboratory cabinetry.Ìý

Residential Multi-family: While the primary structure is 27.5-year property, high-density residential developmentsÌýcan offerÌýsignificant reclassification opportunities.Ìý

• Examples:ÌýFlooring such as luxury plank vinyl and carpeting,ÌýarchitecturalÌýmoldings,Ìýcommunity room amenities such as kitchen millwork, plumbing and electrical connectionsÌýand site improvements like “dog parks,” resort-style poolÌýareas, and complex landscaping.Ìý

Retail: For retail owners, the focus is on the “customer experience” elements and the frequent turnover of interior spaces.Ìý

• Examples: Decorative lighting, specialized storefronts, unique flooring, and parking lot improvements,ÌýlikeÌýparking areas,Ìýsidewalks, andÌýspecialized drainage.Ìý

Hotels:ÌýHospitality properties offer premier opportunities for accelerated depreciation due to the high volume ofÌýpersonal propertyÌýrequiredÌýfor guest comfort.Ìý

• Examples: Wallcoverings, carpeting, commercial kitchenÌýplumbing-ÌýandÌýelectrical-equipmentÌýconnections, andÌýsuperbÌýsiteÌýamenitiesÌýlike fountains and decorative landscaping.Ìý

Auto Dealerships:ÌýDealerships are unique because they combine retail, high-tech service bays, and hospitality.Ìý

• Examples:ÌýDemountable showroom glass partitions,Ìýspecialized lighting, hydraulic lift reinforcements,Ìýsand/oil separators,Ìýshop drainage, and extensive site improvements like display lot paving,Ìýmonument signage,Ìýand site lighting.Ìý

Manufacturing: IndustrialÌýplantsÌý canÌýbe among the highest-yielding properties for cost segregation. Beyond the four walls, these facilitiesÌýcontainÌýspecialized infrastructure designed solely for production.Ìý

• Examples: Specialized HVAC equipment usedÌýasÌýan integral part of the manufacturing process or other usesÌý(such asÌýinÌýcleanrooms), process-related plumbing, and dedicated electrical connections for machinery and equipment used in the manufacturing process.Ìý

The QPP OpportunityÌý

In addition to theÌýsavings aÌýtraditional cost segregation studyÌýenables, the OBBB has introduced anÌýadditionalÌýmassive shift for the manufacturing sector through Qualified Production Property (QPP). Under IRC § 168(n), businesses can now potentially expense 100% of theÌýqualifiedÌýcost of the building shellÌýand applicableÌýbuildingsÌýsystemsÌýin the year it is placed in service.Ìý

To qualify, the facility must be an integral part of a production activityÌý—Ìýsuch as manufacturing or refiningÌý—Ìýthat resultsÌýin a “substantial transformation” of raw materials.ÌýUltimately,ÌýreclassifiedÌýpersonal propertyÌýand site improvementsÌýare handled byÌýbonus depreciation,ÌýwhileÌýQPP handles the “building”ÌýportionÌý,Ìýcreating a path toÌýpotentiallyÌý100% total facilityÌýexpensing.Ìý

While QPP offers an incredible opportunity, it is not a “blanket” deduction for every square foot of a facility. The IRS excludes space used for offices, sales, or finished-goods storage.Ìý

A specialized QPP cost segregation study isÌýrequiredÌýto:Ìý

1. Allocate Basis:ÌýProvide an engineering-based method to separate eligible production areas from ineligible administrative space.Ìý
2. Verify the 95% Rule:ÌýDetermineÌýif the facility meets the “95% de minimis rule,” which allows the entire building to qualify if production space meets that threshold.Ìý
3. Substantiate the Claim:ÌýCreate an audit-ready report that documents exactly why specific structural components qualify as an “integral part” of the production process.Ìý

Your TakeawayÌý

Cost segregation is one of the most effective ways to drive immediate cash flow for property owners across all industries. With the OBBB restoring 100% bonus depreciation, the ability to reclassify assets and write them off in year one provides an unparalleled tax shield. Whether you manage a retail portfolio, a hotel, or a medical facility, an engineering-based study is the key to unlocking capital that would otherwise be trapped in a 39-year depreciation schedule.Ìý

To ensure your next facility build, renovation, or purchase maximizes these tax incentives, consult with a specialist to review your facility today.

Frequently Asked QuestionsÌý

Q: Can I perform a cost segregation study on a buildingÌýI’veÌýowned for several years?Ìý

A: Yes. Through a “look-back” study, you can claim all the “missed” depreciation from prior years in the current tax year without needing to amend past returns.Ìý

Q: How does the OBBB’s 100% bonus depreciation interact with a cost segregationÌýstudy?Ìý

A: They work in tandem.ÌýA cost segregationÌýstudyÌýidentifiesÌýthe 5-, 7-, and 15-year assets, and the 100% bonus depreciation allows you to deduct their entire cost in year one, rather than over several years.Ìý

Q: What is the risk of not having an engineering-based study?Ìý

A: Without an engineering-based study, the IRS may disqualify your allocations. The IRS “Cost Segregation Audit Techniques Guide” specificallyÌýnotesÌýthat studiesÌýmustÌýbeÌýperformedÌýbyÌý engineersÌýand other qualified personnelÌýto helpÌýprovide the necessary substantiation forÌýtheseÌýÌýprojects.Ìý

Q: Do I even need a study for my new manufacturing plan — can’t I just deduct it all as QPP?

A:ÌýThese types of facilities typically have other areas of the building that cannot be included in the QPPÌýallocationÌýsuch as offices, breakrooms, and R&D areas.ÌýIf these areas are more than 5% of the total area, then these areas and the site improvements can have a cost segregation study completed in coordination with the QPP study to maximize the first-year deduction of the entire facility.ÌýÌýÌýÌýÌýÌýÌýÌý