On July 4, President Donald J. Trump signed into law H.R. 1, the One Big Beautiful Bill (OBBB) Act. Among the many substantial changes to the tax laws, the extension of bonus depreciation offers significant savings to taxpayers. Furthermore, one of the biggest benefits of extending bonus depreciation is the increased tax savings that can be generated through a cost segregation study.
In the following, we summarize the pertinent points of bonus depreciation under the OBBB, describe cost segregation, and provide an example of the cost savings from a cost segregation study under the OBBB relative to the prior tax law.
Extension of 100% Bonus Depreciation – The OBBB reinstates a full 100% deduction for qualifying properties acquired and placed in service between Jan. 19, 2025 and Dec. 31, 2029. The deduction was previously set at 40% for 2025 and was projected to phase out by 2027. Alongside bonus depreciation, a new elective 100% depreciation allowance has been introduced for qualified production property (QPP) placed in service until 2030. This allowance applies to newly built and certain existing non-residential real estate utilized for manufacturing, production, or refining specific tangible personal property within the United States. Generally, this new depreciation benefit covers properties where construction commences after Jan. 19, 2025, and before Jan. 1, 2029, or properties acquired after Jan. 19, 2025. It is important to note that there are no retroactive changes to bonus depreciation for the 2023 and 2024 tax years.
The OBBB's new rules regarding bonus depreciation offer significant opportunities for savings through conducting a cost segregation study. In the following, we define a cost segregation study and provide an example of the cash tax savings a property owner can generate under the OBBB relative to the prior law.
What is Cost Segregation?
Cost segregation is a tax strategy used by businesses and real estate investors to accelerate depreciation deductions, thereby reducing taxable income and improving cash flow. These studies involve a detailed analysis of a building's components and their respective costs, allowing certain portions of the property to be reclassified from real property to personal property. By doing so, these components can be depreciated over shorter periods (such as five, seven, or 15 years) instead of the standard 27.5 or 39 years for residential and commercial properties. This results in larger depreciation deductions in the early years of ownership, freeing up cash for other investments.
Current and Prior Tax Laws
Under the prior tax law — the Tax Cuts and Jobs Act (TCJA) — taxpayers were allowed to depreciate 100% of eligible property purchased and put into service between Sept. 27, 2017, and Dec. 31, 2022. Known as bonus depreciation, the 100% rate began decreasing by 20% annually starting in 2023, to its current rate of 40% in 2025, decreasing to 20% in 2026, and 0% thereafter. As mentioned above, the OBBB provides an extension of 100% bonus depreciation and therefore an increased net present value savings.
Let's consider an example:
A multi-tenant shopping center is acquired for $36 million in 2025. An appraisal is conducted, and it determines that $7 million is allocated to the land, which does not depreciate. This means the remaining $29 million is assigned as the depreciable value of the property. A cost segregation is performed on the acquired property after closing, resulting in:
|
$29,000,000 – Depreciable Basis |
The OBBB 100% Bonus Depreciation |
TCJA 40% Bonus Depreciation |
|---|---|---|
|
Five-Year Personal Property |
$6,750,000 |
$6,750,000 |
|
15-Year Personal Property |
2,500,000 |
2,500,000 |
|
39-Year Real Property |
19,750,000 |
19,750,000 |
|
First Year Bonus Depreciation (2025) |
9,250,000 |
3,700,000 |
|
Total 2025 Depreciation (including non-bonus-eligible depreciation) |
9,878,400 |
5,213,400 |
|
Net Depreciation Adjustment (2025 depreciation difference between cost segregation and without) |
8,955,700 |
4,290,700 |
|
2025 Tax Savings (assuming 25% tax rate) |
$2,239,000 |
$1,072,700 |
Not only can the taxpayer depreciate the five- and 15-year assets at an accelerated rate, but these asset classifications qualify for the extended bonus depreciation at 100% as set forth in the OBBB. Quantifying the benefit of the analysis under the OBBB using a 25% effective tax rate amounts to a recognized first-year benefit of $2.239 million. Under the TCJA, with the 2025 bonus depreciation at 40%, this would have amounted to roughly half of the first-year benefit at $1.0727 million comparatively.
In summary, a cost segregation study without any bonus depreciation could provide significant cash tax savings, while the TCJA provided an increased benefit through bonus depreciation of 40% in 2025, and the OBBB provides an even greater benefit with the extension of 100% bonus depreciation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
