Cost Segregation is known to be a tax incentive that allows businesses to deduct the cost of assets that qualify over a short life depreciation schedule. It accelerates tax deductions, which can lower taxable income and improve cashflow, and it applies to both new and used property. Bonus depreciation allows businesses to accelerate a greater percentage of short life deductions compared to standard cost segregation and strait line depreciation methods.  

100% Bonus Depreciation  

Before the new One Big Beautiful Bill (OBBB) was passed by Congress on July 3, 2025, bonus depreciation was predicted to follow a phase-down schedule beginning in 2023. With the President signing the OBBB into law July 4, 2025, bonus depreciation is essentially supercharged because the bill reinstates 100% first-year bonus depreciation for eligible tangible property obtained after January 19, 2025. Businesses can now fully deduct the cost of qualifying assets in the same year they are purchased and placed into service.  

For example, if a business purchases short life qualified machinery for $100,000, using bonus depreciation would allow them to deduct the full amount in the first year instead of spreading the deduction over five or seven years.  

Before the OBBB, bonus depreciation was primarily governed under the 2017 Tax Cuts and Jobs Act (TCJA), which provided 100% bonus depreciation for eligible property from September 28,2017 to December 31, 2022 before it began phasing out at a rate of 20% per year starting in 2023.  

Economic Growth  

Economists anticipate that restoring 100% bonus depreciation will boost the U.S. economy by encouraging others to make greater investments in machinery and other equipment and this should ultimately promote economic growth. This change in tax policy for business owners provides greater certainty for long-term tax and investment strategies.  

How Will Business Property Owners Benefit?  

For property owners who are investing in rental or commercial real estate, the reinstatement of 100% bonus depreciation under the OBBB is a gamechanger. Some of the benefits resulting from the law include immediate tax deductions and enhanced cash flow. Furthermore, bonus depreciation is especially powerful when paired with cost segregation. A cost segregation study breaks down the components of a property into short-life asset classes, such as 5,7 and 15 years. By using 100% bonus depreciation, those components can be fully expensed right away, resulting in greatly accelerating deductions.  

Considerations  

One thing to consider if you are a business property owner is to time or plan your acquisitions carefully. As mentioned earlier, assets must be placed into service after January 19, 2025, for them to fall under the new bill. It is important to strategically plan your taxes, including cost segregation, to help fully leverage the benefits of the new bill. Act now and maximize your property’s value while the full benefit is in effect.  

Return of 100% Bonus Depreciation Webinar  

In a free webinar, Sari Quinlan will be discussing the return to 100% Bonus Depreciation at 10am CST on Friday, July 11th  . The webinar will cover an in-depth look at bonus depreciation and what to expect with the new changes, as well as how cost segregation studies work and how they can help property owners maximize the benefits. 

Register for the Free Webinar

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Understanding the legal background and rationale for property taxpayer cost allocation is crucial for comprehending cost segregation studies and their intricacies. Based on the IRS Cost Segregation Audit Technique Guide, O’Connor will educate you about asset clarity, depreciation changes, and how it can get you ready for a cost segregation investigation.

Accelerated Cost Recovery System: 1981

In 1981, Congress put into place the Accelerated Cost Recovery System (ACRS) – a cost recovery method – to simplify depreciation rules to allow greater deductions over shorter periods of time. By adding a statutory percentage to the cost of the recovery property, ACRS permitted depreciation deductions over a defined recovery period. A statutory percentage or tax rate is the rate mandated by law on taxable income that falls within a given tax bracket. With the introduction of ACRS came many changes, for example the removal of salvage value and the concept of useful life. Under ACRS, cost recovery of assets was faster and provided a total of six recovery periods. Between 1981 and 1886 many properties during this time were eligible for ACRS. Other changes that came from ACRS was preventing component depreciation as a method for calculating depreciation for buildings.

According to ACRS, starting on the later of the date the building is brought into service or the component is placed into service, the depreciation deduction for any building component must be calculated in the same way as the deduction permitted for the structure. This new system brought along several changes to depreciation; however, it was beneficial for many taxpayers since it allowed for greater deductions overall.

Modified Accelerated Cost Recovery System: 1986

In 1986, ACRS was modified by congress and was later renamed Modified Accelerated Cost Recovery System (MACRS). With the modification came new changes and improvements to the system. For example, MACRS repealed ACRS § 168(f)(1), which related specifically to components of § 1250 class property. MACRS was a cost recovery method that was based on the applicable depreciation method, recovery period, and convention outlined in § 168.

The applicable depreciation method is the most straightforward and reliable approach for calculating depreciation, because it makes sense when working with an item whose value declines consistently over time at the same pace.

With the modification of ACRS, MACRS provided two depreciation systems:

1. General Depreciation System (GDS) – a method used to compute personal property’s depreciation. GDS allowed for the use of tax depreciation known as the declining – balance – method.

2. Alternative Depreciation System (ADS) – a method of calculating the depreciation of certain types of assets in certain conditions. The ADS technique lowers the annual depreciation expenditure reported by using the straight-line approach to compute depreciation over a longer time period than the GDS method.

In order to calculate depreciation deductions for later years, MACRS also needed the necessary basis modifications. Additionally, it amended other ACRS regulations, such as property classifications. For structures and structural elements, the recovery time increased significantly under MACRS. The applicable depreciation method, convention, and recovery time were impacted by the property’s MACRS classification in addition to the new depreciation methods. Each item of property depreciated under MACRS is assigned to a property class. Class lives for MACRS are outlined in Rev. Proc. 87-56, 1987-2 C. B. 674. A property class establishes the item’s recovery period. Statutes or class lives are used to calculate the applicable recovery periods for MACRS.

Rev. Proc. 87-56, 1987-2 C. B. 674 established two broad categories of depreciable assets:

1. Asset classes 00.11 through 00.4 consist of specific assets used in all business activities.

2. Asset classes 01.1 through 80.0 consist of assets used in specific business activities.

By the end of 1986, MACRS continued preventing component depreciation as a method for calculating depreciation for buildings. MACRS enacted § 168(i)(6), improvements made to real property are depreciated using the same recovery period applicable to the underlying property, assuming the underlying property was placed in service at the same time the improvements were made. Improvements to § 1245 property and §1250 property. In the next blog, O’Connor will discuss the terms “§ 1245 property” and “§1250 property” and the meanings given by §1245(a)(3) and §1250(c).

Since the early 1930’s, depreciation regulations have encountered many modifications and changes so as to benefit taxpayers. Depreciation helps taxpayers increase cash flow by reducing reportable income. A good cost segregation study is an excellent tool for property owners to maximize depreciation and improve cash flow. The IRS Cost Segregation Audit Technique Guide, provides up-to-date information and resources for a quality study.

How Can O’Connor Help You

As a taxpayer, you will learn more about cost segregation and its operation from O’Connor’s blog series, which is based on the IRS Cost Segregation Guide. Taxpayers will have a better understanding of asset categorization, cost recovery, and depreciation methods by studying the history of depreciation. In upcoming blogs, O’Connor will discuss how to differentiate between §1245 and §1250 property tests and how cost segregation affects building systems. Work with O’Connor’s cost segregation experts to assist you in conducting a successful cost segregation study for your real estate.

The post Cost Recovery Systems that Changed Depreciation Today  appeared first on O'Connor Cost Segregation.

If you own a business, you’re probably familiar with the fundamentals of depreciation. The government permits you to deduct a portion of the cost of an asset you buy or build from your income each year, as a tax deduction. This process lowers your net income and corresponding tax liability. Occasionally, our friends in Washington, D.C provide additional incentives by permitting “Bonus Depreciation” to varying degrees.

Bonus depreciation is a benefit property owners and real estate investors may be able to incorporate if it is identified as part of a cost segregation study. It is the ability to deduct a larger portion and as a result lower income taxes more significantly for owners of assets or property purchased in the first year. Thanks to the Tax Cuts and Jobs Act of 2017, property owners have the ability to deduct bonus depreciation at a rate as high as 100% on profitable commercial real estate investments, depending on the year of purchase! This means bonus depreciation allows you to deduct 100% of identified short life depreciation ,with a depreciation life of 20 years or less, for properties purchased between September 27, 2017 through December 31, 2022. This applies to items that are IRS approved for short life depreciation.

How does bonus depreciation work?

There are two things you need to know to make bonus depreciation work for you:

Purchase of an asset for profit; commercial asset

Purchase or build an asset and place it in service. Once purchased and in-service, existing short life tangible assets that are IRS predetermined with a useful life of 20 years or less are eligible for bonus depreciation, which is currently at 60% through the end of 2024.

Available Bonus Depreciation

The bonus depreciation rate depends on when the asset was placed into service. The guidelines included in the TCJA – Tax Cuts and Job Act  currently provides 100% bonus depreciation for assets purchased after September 27, 2017, and before January 1, 2023. But starting in 2022, the 100% bonus depreciation began tapering off, with qualified property purchase in 2024 only receiving a 60% benefit. The table below displays the depreciation rates by placed in service year:

The bottom line

Bonus depreciation is an excellent tool for reducing federal income taxes for most commercial real estate owners. Act now to take advantage of remaining bonus depreciation on all “short life” assets. Short life assets are an asset with useful life predicted to be less than eight years.

For a fair assessment of how you can incorporate this process to reduce your taxes, take advantage of our free bonus depreciation calculator. Contact O’Connor to schedule a meeting to discuss how we may assist you in reducing your federal income tax burden.

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Cost Segregation is not a new concept, but provisions contained within the Tax Cuts and Jobs Act of 2017 have ignited interest and turbo-charged the positive impact significantly.  The point source for these changes?

Bonus Depreciation!

Let’s take this a step at a time and start with a basic question.  What is depreciation?

Simply put, depreciation is an accounting tool which allows a portion of your asset value to be deducted each year from your generated income, thereby reducing your net income and resulting federal tax burden.

This provides an acknowledgement of the decrease in value of personal property and/or some real property due to wear and tear, aging, functional obsolescence and other factors.

For a long time, straight-line depreciation was practiced, and still is in many instances.  This allows you to depreciate your asset over 39 years for standard commercial assets, or over 27.5 years for apartments.  Here is an example using rounded numbers for a small office building:

Purchase Price  $2,000,000

Land Value  $400,000

Depreciable Basis of Improvements  $1,600,000

Annual Depreciation  $41,025 ($1.6M / 39 years)

So, in the example above, when filing your income taxes for the ownership entity of the asset, you would be able to deduct $41,025 in depreciation from generated income.  Since this in essence comes right off your bottom line, you would effectively save over $15,000 in taxes (based on a 37% tax bracket) by utilizing straight-line depreciation.  Not bad at all!

Enter Cost Segregation!

Cost Segregation has been around for decades in various forms and iterations, as far back as the late 1950s (Shainberg vs. Commissioner), then on through the 1970s (Revenue Ruling 73-410; Whiteco Industries vs. Commissioner); the 1980’s with the enactment of ACRS and subsequently with MACRS (Modified Accelerated Cost Recovery System) in 1986, impacting assets placed in service after January 1, 1987.  It has been continually refined and tweaked by various court cases (notably Hospital Corporation of America vs. Commissioner in 1997).

Cost Segregation provides a way for a knowledgeable individual to break out the components of an asset into the appropriate depreciation life span, allowing for shorter recovery periods and accelerated depreciation.  In most instances, this involves parsing the asset into 5, 7, and 15 year depreciation periods, with the remaining long life assets being broken out into the requisite Units of Property as provided for in the 2014 Tangible Asset and Repair Regulation dictates.

Let’s get back to our original example to show the positive effect of Cost Segregation on your bottom line.

Purchase Price  $2,000,000

Land Value  $400,000

Depreciable Basis of Improvements:

• 5 Year Assets  $192,000
• 7 Year Assets  $8,000
• 15 Year Assets  $208,000
• 39 Year Assets  $1,192,000

Annual Depreciation  $80,868*

*NOTE that this figure is an average depreciation figure over the first five years of the use of Cost Segregation.  Due to the varied nature of the depreciation calculations based on the recovery period, it is impossible to provide a completely accurate number for one year for comparison purposes.

That’s roughly DOUBLE the depreciation you can expect from straight-line depreciation, and could lead to bottom line tax savings of almost $30,000 in the same 37% tax bracket.

And finally, BONUS DEPRECIATION!

Sorry for the delay, but we are finally at the main point!  The Tax Cuts and Jobs Act of 2017 contained a provision allowing for 100% Bonus Depreciation for any commercial, for-profit asset placed in service or purchased after September 27, 2017!

This means that for any portion of the asset with a depreciation-life of 20 years or less, 100% of the value can be depreciated in the first year of ownership! Read what the IRS is saying about bonus depreciation here.

For most commercial properties, we typically find assets with a depreciation life of 5 years, 7 years and 15 years, along with the 39 year depreciation life, during the course of our cost segregation studies. Given the new laws, any assets found in those shorter depreciation life categories can be depreciated 100% in the first year of your ownership of the asset.

This can amount to between 25% and 45% of the total asset value, depending upon our findings during the site inspection!

Let’s look at our previous example through the lens of 100% Bonus Depreciation:

Purchase Price  $2,000,000

Land Value  $400,000

Depreciable Basis of Improvements:

• 5 Year Assets $192,000
• 7 Year Assets $8,000
• 15 Year Assets $208,000
• 39 Year Assets $1,192,000

First Year Annual Depreciation  $408,000

That’s about 10 times the first year depreciation available via straight-line depreciation, and more than five times that available from standard cost segregation!  In a 37% tax bracket, that equates to just over $150,000 in positive bottom line impact potential!

I’ve purposefully kept these figures on the low side of our findings continuum, with the 100% bonus depreciation representing roughly 25% of the depreciable basis.  We often find much more!

The new tax law allows the use of bonus depreciation for only a few years. If you are interested in taking advantage of the new tax laws, protecting your bottom line, and maximizing your cash flow, act now. You may contact here us and request a free preliminary evaluation.

Check out our quick and free tax savings calculator to see how much you can save with a Cost Segregation study using bonus depreciation.

The post How commercial property owners can use bonus depreciation to reduce income taxes appeared first on O'Connor Cost Segregation.

Cost Segregation Studies (CSS) have become more common because this Internal Revenue Service (IRS)-approved process reduces income tax and increases cash flow. Intelligently executed, cost segregation will provide real estate owners with an IRS sanctioned cash windfall. Property owners that generate extra depreciation can convert income that would be taxed at 35 percent to income taxed at 15 percent.

In addition, taxes are payable when the property is sold. Investors both reduce the tax rate (from 35% to 15%) and defer payment of income taxes.

Property owners that generate extra depreciation can convert income that would be taxed at 35 percent to income taxed at 15 percent. Read more about depreciation here and how cost segregation increases cash flow using depreciation.

Thus, investors’ taxes are both reduced and deferred.

Typically, the increased depreciation in the early years of ownership can offset much of the income derived from the property. When depreciation advantages expire, the property can be sold, and taxes are paid at the capital gains rate of 15 percent. In such cases, this defers income taxes by five, 10, or even 15-plus years.

Thus, carefully timed, cost segregation can lower the investor’s income tax rate from 35 percent to 15 percent. Of course, there are no taxes paid if the owner elects to conduct a 1031 exchange.

Cost segregation allows the property owner to achieve accurate and timely depreciation instead of deferring much of it for 39 years (for commercial property) or 27.5 years (for apartments). Imagine waiting 39 years to depreciate a carpet that wore out after five! Incredibly, this is more common than not.

Listed below are examples of 5-year, 7-year, and 15-year depreciable properties:

• 5-Year: carpeting and vinyl tile.
• 7-Year: unexpensed office furnishings and cluster mailboxes
• 15-Year: landscaping, parking lots, and sidewalks

Such items typically represent 20 percent to 40 percent of the total cost. By properly depreciating each item, investors can increase depreciation by 50 percent to 75 percent during the early years of ownership.

If the owner has not already identified a property’s short-life components, the investor can “catch-up” underreported depreciation in the first year after a CSS without amending prior tax returns. The investor’s accountant simply prepares a Form 3115 (change in accounting method), which corrects the depreciation.

You may also utilize the newly passed tax law for bonus depreciation. This method accelerates depreciation and using bonus depreciation in your cost segregation study significantly increases cash flow.

Find out how much you can save and how a cost segregation study can increase your cash flow by using our quick and free tax savings calculator.

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