By Jim Donovan, CPA | Partner/National Tax Office, Eide Bailly
A version of this article first appeared on EideBailly.com.
Cost segregation is a tax strategy that breaks a building’s costs into its parts, so you can depreciate them faster. Instead of depreciating the whole building over 39 years (or 27.5 for residential), a study lets you identify components — like flooring, wiring, and lighting — that qualify for 5-, 7-, or 15-year recovery. That means bigger deductions sooner, better cash flow, and a faster return on your investment.
The idea is simple: not all parts of a building wear out at the same rate. By reclassifying assets tied to business operations, not just the structure, you can accelerate depreciation and reduce your current-year tax liability.
The Basics of a Cost Segregation Study
A cost segregation study reclassifies assets in a way that stands up to IRS scrutiny.
If you own or acquire commercial or residential property and pay significant taxes, a cost segregation study is often a no-brainer. Even if you’re in a lower bracket, reclassifying components can help with future deductions — like writing off portions of a building that are later removed, replaced, or improved.
Bonus Depreciation Rules
Bonus depreciation allows businesses to immediately deduct a large portion of qualifying asset costs in the year they’re placed in service. Since 2023, bonus depreciation has been phasing down by 20% each year and was set to reach 0% by 2027 — until the recent passage of the One Big Beautiful Bill Act.
Signed by President Trump on July 4, the bill reinstates 100% bonus depreciation for certain property — but with important caveats. This legislation significantly changes the planning landscape.
There are three key dates to keep in mind:
- January 19, 2025
- Date of Written Binding Contract
- Date Placed-in-Service
January 19, 2025, is the effective date for the new 100% bonus depreciation rule. Eligibility for the increased deduction is not based on the date the property is placed in service but rather on the date that you signed the contract (whether construction or acquisition) to acquire the property.
A building placed in service in 2025 may not qualify for 100% bonus depreciation if the contract to acquire or construct the building was signed on or before January 19, 2025. In those cases, bonus depreciation follows the pre-existing phaseout schedule:
- 40% if placed in service in 2025
- 20% if placed in service in 2026
- 0% if placed in service in 2027
Only properties with contracts signed after January 19, 2025, and placed in service after that date will qualify for the fully reinstated 100% bonus depreciation.
Other Considerations
- Work with a qualified professional. To properly segregate the building components, it is important to work with a qualified engineer or professional who can accurately identify the various components of your property.
- Beware of limitations. There can be limitations on a taxpayer’s ability to claim losses, including the passive activity rules, at risk rules, the basis limitation rules, and the overall business loss rules.
Specialty Properties
Auto dealerships, gas stations, and car washes often have high potential for cost segregation. These buildings include specialty assets — service bays, decorative facades, signage — that can be depreciated over shorter periods of time.
Because these businesses frequently renovate, expand, or acquire new properties, it’s critical to identify and break out building components early.
A cost segregation study helps you maximize depreciation upfront and lays the groundwork for future tax savings — including the ability to recognize partial dispositions and expense demolition costs when assets are retired or replaced.
Cost Segregation as a Strategic Tax Tool
At Eide Bailly, we view cost segregation as a smart way to improve cash flow and strengthen your tax position. The IRS allows studies after purchase, construction, or renovation — giving you flexibility on when to claim deductions and simplifying future accounting for improvements or disposals.
Reclassifying 20–30% of a building’s cost to shorter lives can create meaningful upfront tax savings. And while bonus depreciation is phasing out through 2027, cost segregation still delivers strong value, especially for industries like manufacturing, healthcare, construction, and real estate.
Cost segregation is just the beginning. Our Fixed Asset Services team takes a holistic approach, backed by the strength of our National Tax Office, to uncover every opportunity available so you can keep more of what you earn, make smarter decisions, and build a tax strategy that supports your long-term success.