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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In 2024, O’Connor performed a cost segregation study for a retail property owner in Oklahoma where the end result identified almost $700K in accelerated depreciation by leveraging 100% bonus depreciation. O’Connor has performed the Cost Approach(exclusive of land valuation and Highest and Best Use Analysis) for the short-life depreciation components, as well as providing a breakdown of the 27.5-year or 39-year real property building components.

The depreciable basis is the portion of a property’s purchase price or construction cost that is eligible for depreciation under the tax code. It represents the amount that can be allocated and written off as a tax deduction over time based on the property’s useful life.

In our studies, the depreciable basis is broken down into different asset classes with varying terms of useful life. For example, personal property, which in the case of this retail client includes checkout stands, refrigeration equipment, restroom fixtures, employee lockers, as well as a walk-in cooler and freezer. These items have a 5- or 7-year life. Land improvements might have a 15-year life. In this study some elements of the property fitting this description are building sidewalks, a wood fence enclosure with chain-link gates, a storm water retention pond, wood fencing, and a paved parking lot.

The Depreciable basis for the property is $1,665,000. Because the property was purchased in 2022, the assets qualify for 100% bonus depreciation. Had the property been purchased in 2024, according to the phase-out schedule for bonus depreciation, only 60% bonus depreciation would be allowed. Property owners are sure to keep a close eye on changes to legislation that may result from the new government administration.

Utilizing 100% bonus depreciation, first year depreciation in this case study is $696,662.

Short-Life Depreciation Components

If you own retail property and are interested in a cost segregation study to reduce your federal income tax burden, O’Connor offers a free price quote to perform your study. Your property analysis will include a step-by-step guide on how to claim your savings and a toll-free hotline to answer your questions. We have completed over 15,000 reports resulting in hundreds of millions of dollars in federal tax savings for our clients. In 2024 alone, O’Connor’s cost segregation team saved clients close to $350 million in federal taxes.

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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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Active real estate investors can legitimately increase depreciation, and thereby significantly enhance cash flow, through the use of a quality cost segregation study.  An intelligently executed and properly prepared cost segregation study can provide real estate owners with an IRS-sanctioned cash windfall.  Cost segregation studies identify short-life depreciable components, categorizing them as 5-Year, 7-Year or 15-Year depreciable life assets, and allows for not only the shorter depreciation life, but accelerated depreciation via the use of a 200% declining balance for the 5 and 7-Year components, and a 150% declining balance  for the 15-Year components.  The result is significantly increased depreciation in the early years of asset ownership, offsetting much of the income derived from the property.

Short-life depreciable components are plentiful on most properties and can represent from 20% to 40% of the total cost of the asset.  Here is a short list of examples of each short-life category:

• 5-Year: carpeting; vinyl tile; window coverings
• 7-Year: kiosk/cluster style mailboxes; park benches
• 15-Year: landscaping; parking lots; sidewalks

One of our clients recently asked us to perform a cost segregation study on a newly acquired multifamily asset.  Working with their depreciable basis of just under $20,000,000, we identified over 38% of the basis as short-life depreciable components, generating almost $1,000,000 in additional depreciation and more than $385,000 in potential tax savings in the first year of study use.  Over the first five years, those potential tax savings may top $1,600,000!  That is money that can be rolled back into the property for improvements, distributed to partners, or utilized as seed money for the next purchaseRedirection.

Correctly identifying, valuing, and documenting the short-life components is critical for a quality cost segregation study.  The IRS, in their IRS Field Audit Techniques Guide, publishes checklists for a quality study and a quality cost segregation report.  As long as the study complies in all areas with the IRS guidelines, it can be used to legitimately increase your depreciation and reduce your taxes, thereby enhancing your cash flow and bottom line!

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