Cost Segregation Study for Small Business Owners: Accelerating Building Depreciation

A cost segregation study is an engineering-based analysis that identifies building components that can be depreciated over shorter recovery periods than the standard 39 years (commercial) or 27.5 years (residential rental). By reclassifying certain components as personal property (5 or 7-year) or land improvements (15-year), the study creates accelerated depreciation deductions that can generate immediate tax savings of $50,000-$200,000+ for a building purchased or constructed for $500,000 or more.

How does a cost segregation study work in practice?

Can Section 179 replace bonus on cost seg components?

Sometimes, but bonus usually does the heavy lifting. Bonus covers every reclassified component with a recovery period of 20 years or less, at 100% for property acquired after January 19, 2025, with no dollar cap. Section 179 only covers section 1245 property plus a short list of building improvements you elect, and it can’t exceed your business income.

The Section 179 limit for 2025 is $2,500,000, shrinking dollar for dollar once you place more than $4,000,000 of 179 property in service. For 2026 it’s $2,560,000 and $4,090,000. The income cap counts taxable income from all your active businesses, wages included, and anything over it carries forward. Where Section 179 earns its place is precision. You choose the assets and how much of each one’s cost to expense, while bonus applies to a whole class of property unless you elect out.

Should a rental owner skip bonus on a cost seg study?

Sometimes. Rental activities are passive by default, so a large bonus-driven loss on a rental building may be limited instead of offsetting your other income. Section 179 usually isn’t an option either, because it doesn’t cover rental property unless renting is your trade or business. That leaves bonus or regular MACRS on the reclassified components.

Getting regular MACRS means electing out of bonus for each class of property you want to spread, for that year, and the election can be revoked only with IRS consent. The structure stays on straight line either way, over 27.5 years for residential rental property and 39 years for nonresidential. If the building houses your own business, Tax Implications of Buying Commercial Real Estate covers the self-rental side.

• Tax Implications of Buying Commercial Real Estate for Your Business

When does a cost segregation study pay for itself?

A cost segregation study typically pays for itself when the building’s purchase price or construction cost exceeds $1 million, though properties with heavy tenant improvements or specialized systems can benefit at lower values. The study reclassifies building components from 39-year (commercial) or 27.5-year (residential) property into 5, 7, or 15-year categories, accelerating depreciation deductions. Common reclassified items include carpeting and floor coverings (5-year), decorative lighting and millwork (7-year), site improvements like parking lots and landscaping (15-year), and specialized electrical and plumbing serving specific equipment. The tax savings from a cost segregation study depend on the bonus depreciation percentage in effect, your marginal tax rate, and the percentage of building costs that can be reclassified, which typically ranges from 15% to 40% of total building cost.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.