Many business owners depreciate the cost of a commercial building over 39 years and move on. But that approach may leave substantial tax savings on the table. A cost segregation study can help uncover those savings by accelerating depreciation on qualifying building components — reducing taxes and improving cash flow.
What Is a Cost Segregation Study?
A cost segregation study applies accounting principles and engineering analysis to break down the total cost of a building. Instead of treating everything as long‑term real property, the study identifies components that qualify as:
- Tangible personal property, or
- Land improvements
These assets can often be depreciated over five, seven, or 15 years, rather than 39 years. While the total depreciation remains the same over time, accelerating deductions can significantly reduce near‑term tax liability and boost cash flow.
The IRS formally recognizes cost segregation when studies are properly prepared and documented, as outlined in its audit technique guidelines.
READ MORE: Make the Most of Depreciation Deductions to Reduce Your Tax Bill
Cost Segregation Study Timing Matters
Commercial buildings and commercial rental properties are generally depreciated over 39 years under federal tax law. Residential rental property follows a 27.5‑year schedule.
However, many buildings include components with much shorter recovery periods, such as:
- Portions of HVAC, plumbing, electrical, fire protection, and security systems
- Drywall and interior partitions
- Doors and cabinetry
- Flooring and wall coverings
- Data and communication infrastructure
- Specialized lighting and wiring
Certain items that appear to be part of the structure may actually qualify as personal property if they serve a business function rather than a structural one. Examples include reinforced flooring for heavy equipment or dedicated cooling systems for data centers.
When these assets are segregated properly, depreciation deductions are pulled forward — improving cash flow without changing total depreciation over the life of the property.
Recent Tax Law Changes Increase the Value
Recent legislation under the One Big Beautiful Bill Act (OBBBA) has made cost segregation even more valuable for many businesses.
1. Bonus Depreciation Restored
The OBBBA restored 100% first‑year bonus depreciation for qualifying assets placed in service after January 19, 2025. Although commercial buildings themselves don’t qualify, segregated components with shorter recovery periods often do. Bonus depreciation has no dollar cap or phaseout, making it especially valuable for growing businesses and larger projects.
2. Expanded Section 179 Expensing
For tax years beginning in 2025, Section 179 allows businesses to immediately expense up to $2.5 million of qualifying assets, with a phaseout beginning at $4 million. For 2026, those limits increase to $2.56 million and $4.09 million, respectively.
Again, buildings don’t qualify — but many segregated components do.
3. New Qualified Production Property (QPP) Deduction
Manufacturers and certain agricultural businesses may qualify for a 100% deduction for qualified production property (QPP). Eligible property must:
- Begin construction after January 19, 2025, and before January 1, 2029
- Be placed in service before 2031
For qualifying properties, this provision can reduce the need for a cost segregation study. However, the rules are highly specific, and many businesses won’t meet all requirements.
It’s Not Too Late to Claim Missed Depreciation
Even if you placed a building in service years ago, you may still benefit. The IRS allows taxpayers to “catch up” on missed depreciation by filing a change in accounting method — without amending prior returns.
This approach can generate a large one‑time deduction in the year the study is completed, making cost segregation especially attractive for established businesses.
Professional Guidance Is Essential
A cost segregation study is not a do‑it‑yourself project. The IRS closely reviews these deductions, and improper classifications can trigger audits or adjustments.
Working with experienced professionals ensures:
- Reasonable and defensible cost allocations
- Compliance with IRS guidance
- Documentation that can withstand scrutiny
At Landmark CPAs, our team evaluates whether a cost segregation study makes sense based on your specific property, tax position, and long‑term goals. Learn more about our cost segregation services or contact Landmark CPAs to start the conversation.
Final Thoughts on a Cost Segregation Study
A cost segregation study can be a powerful way to lower taxes and improve cash flow — especially in light of recent depreciation law changes. While it isn’t right for every business, the potential savings often far outweigh the cost when the facts align.
If you own or are constructing commercial property, now is the time to explore whether this strategy fits your situation. Landmark CPAs can help you determine the opportunity and implement it with confidence.
© 2026. Originally published October 2021. Updated May 2026.
