If you own the building your business operates from, or any commercial real estate, cost segregation is something your accountant should have mentioned by now. If they haven't, bring it up at your next meeting. It's a legitimate strategy that can significantly accelerate your depreciation deductions in the early years of ownership.
What Cost Segregation Is
When you buy a commercial building, the IRS lets you depreciate it over 39 years. Cost segregation is an engineering-based study that breaks the building into components. The plumbing, electrical, HVAC systems, flooring, and certain other elements can often be reclassified into shorter depreciation categories (5, 7, or 15 years). Depreciate the same asset faster, you get the deduction sooner, and money now is worth more than money later.
Bonus depreciation rules, when in effect, can make this even more powerful by allowing immediate deductions on reclassified components in the year of purchase.
The Numbers That Make It Work
A cost segregation study from a qualified engineering firm typically costs $5,000-$15,000 depending on the complexity of the property. The benefit needs to exceed that cost meaningfully. As a rough rule of thumb, the strategy tends to make sense for properties valued at $500,000 or more. Below that, the study cost may eat too much of the tax benefit.
Your accountant can do a preliminary estimate of the potential tax savings before you pay for the study. If the estimated benefit is $30,000 in accelerated deductions and you're in a 30% combined tax rate, that's $9,000 in tax savings against a $7,000 study cost. The math works. If the numbers are closer together, it's a harder call.
Who Should Explore This
Contractors who recently purchased commercial property are the primary audience. The best time to do a cost segregation study is in the year of purchase or the first year or two afterward. There are lookback provisions that let you catch up on missed depreciation from prior years without amending returns, but front-loading the benefit is generally preferred.
Also relevant if you've done significant leasehold improvements to a space you rent. Some tenant improvements qualify for cost segregation treatment too. Ask your accountant specifically about your situation.
This isn't a strategy for everyone. But if you own property and haven't had this conversation with your tax professional, the conversation itself is free and might save you real money.
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Written by
Dina Good
Founder, WerkOps
Dina grew up in the trades. Her father was a contractor, then a building inspector, and the job site was her classroom long before any formal one was. She went on to own her own contracting company, which is where she first felt the pain of running a skilled trade business on bad software and worse spreadsheets. A love of data pulled her into programming, and the two worlds eventually collided into WerkOps - software built by someone who has actually been on the truck.