What Is a Cost Segregation Study?

A cost segregation study is a tax-saving strategy that allows commercial property owners to reclassify parts of their building into shorter depreciation schedules. Instead of depreciating everything over 27.5 or 39 years, a study identifies components—like lighting, flooring, and landscaping—that can be depreciated over 5, 7, or 15 years.

The result? You accelerate depreciation deductions, reduce your taxable income, and increase your cash flow—especially in the early years of ownership.

Why Cost Segregation Study Matters to Small Business Owners

Real estate is often a small business owner's largest asset—and the tax code treats it differently than other purchases. Without a cost segregation study, you’re likely missing out on significant, legal tax savings.

This strategy is especially useful for:

• Medical clinics, dental offices, and veterinary practices

• Restaurants, salons, and retail storefronts

• Warehouses and light industrial buildings

• Office buildings or mixed-use spaces

• Short-term rental properties

Even if you purchased your property years ago, you may still qualify through a lookback study that applies missed deductions retroactively without needing to amend prior returns.

Common Use Cases

• Newly Constructed Building: After finishing a build-out, you have a large amount of capital tied up in improvements. A cost segregation study can front-load depreciation to match your early cash needs.

• Recently Purchased Commercial Property: If you’ve acquired a property for business use, the study can unlock tax savings right away—especially if renovations are also involved.

• Short-Term Rental with High Income: Property used as a short-term rental that qualifies as non-passive activity may be eligible for full depreciation benefits in the year placed in service.

Related Terms and Misconceptions

• Depreciation vs. Expense: Depreciation spreads a cost over time. Cost segregation accelerates this timeline without making the purchase deductible all at once.

• Bonus Depreciation: This is often paired with cost segregation. Under current rules (phasing out after 2026), bonus depreciation allows you to deduct 60% of eligible property in the first year (2025 rate).

• Misconception: “Cost segregation is only for big corporations.” Reality: Small businesses can benefit significantly—especially if you paid $250,000 or more for your property.

Tips for Applying It in Your Business

• Talk to a qualified advisor before making major renovations or purchases—timing matters.

• Keep detailed records of build-out costs, invoices, and contractor estimates.

• Use a specialist—cost segregation requires engineering-based analysis and a formal report to satisfy IRS requirements.

• Review past purchases—even buildings placed in service in prior years may be eligible for a catch-up deduction under Section 481(a).

Want to see how much you could save in taxes? Book a Discovery Call and we'll get started with your business's custom tax plan.