Top Three Cost Segregation Issues Impacted by the One Big Beautiful Bill Act

Kara Scroggs, Director of Federal Income Tax, Fixed Assets, and Cost Segregation at Ryan, recently discussed the most important issues regarding cost segregation found in the landmark One Big Beautiful Bill Act (OBBBA).

Top Three Cost Segregation Issues Impacted by the One Big Beautiful Bill Act

Interviewer: First, can you explain what cost segregation studies accomplish?

Scroggs: A cost segregation study uses a detailed engineering-based analysis, applying relevant court rulings, revenue procedures, and tax law to identify assets within a building that can be depreciated over a shorter period than the 27.5-year or 39-year standard depreciation period for real property. By classifying components in new construction, renovation, or acquisitions as property eligible for a shorter depreciable life, a cost segregation study can identify property eligible for advantageous tax cash benefits.

Interviewer: There were many updates in OBBBA offering greater depreciation deductions to businesses. Which three changes offer the biggest opportunity to businesses requiring a cost segregation study?

Scroggs: First, OBBBA permanently sets bonus depreciation at 100% for qualified property acquired or newly constructed after January 19, 2025. For property with a written binding contract before January 20, 2025, and placed in service after that date, eligible property must use the pre-OBBBA phase-down rates (40% for property placed in service between January 1, 2025, and January 19, 2025, and 60% for property placed in service in 2024).

Interviewer: Why is it important that this deduction is made permanent?

Scroggs: Making the deduction permanent removes the uncertainty of the previous phase-out of bonus depreciation, which was scheduled to decline to 40% this year and 20% for 2026, and sunset in 2027 and beyond. The permanence allows companies to more accurately plan and forecast their capital expenditures that may be eligible for immediate expensing. Bonus depreciation of 100% allows businesses to improve cash flow and reduce taxable income.

Interviewer: What’s the second most important feature impacting cost segregation studies?

Scroggs: OBBBA created a new 100% depreciation deduction for qualified production property (QPP) in the year it is placed in service. This is a significant development, as it extends immediate expensing to certain types of real property, which were commonly depreciated over much longer periods.

Interviewer: What is QPP?

Scroggs: I have written an in-depth article, “A New, ‘Quiet’ Tax Provision Benefits Manufacturers,” published in IndustryWeek, on this topic, but briefly QPP generally was created to incentivize investment in American manufacturing growth and reshoring. QPP includes nonresidential real property used as an integral part of a qualified production activity (QPA). QPA is specifically defined as the manufacturing, production, or refining of a “qualified product” and must involve “substantial transformation” of property that makes up the qualified product.

Interviewer: What are the main requirements of QPP?

Scroggs: I think the most restrictive requirement of QPP is that the building must be owner occupied, not leased to a third-party manufacturer. Therefore, neither the lessor nor the lessee is eligible for the immediate expense deduction created from QPP if a lease is involved. Construction of QPP must begin between January 20, 2025, and December 31, 2029. The property must be placed in service in the U.S. before January 1, 2031. QPP is subject to an original use requirement, though exceptions exist for acquired property.

Interviewer: What part of the manufacturing facility is excluded from this provision?

Scroggs: QPP specifically excludes office, administrative, lodging, parking, sales, research, software development, and engineering activity areas (basically any area of the building that is unrelated to the manufacturing, production, or refining of tangible personal property). Property that uses the Alternative Depreciation System (ADS) is also ineligible.

Interviewer: How does a business calculate the amount of property that qualifies for QPP?

Scroggs: That brings us to the third key impact of OBBBA on cost segregation. It will now become more imperative that cost segregation studies are completed for business transactions involving real property construction and acquisitions to properly identify personal property assets eligible for 100% bonus depreciation. The cost segregation results create substantial tax deductions and help taxpayers achieve substantial cash flow improvements.

Interviewer: Thank you for your time today.

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Contact Ryan’s cost segregation expert below to maximize tax savings, improve cash flow, and leverage the latest OBBBA depreciation opportunities.

Contact:
Kara Scroggs
Director
Ryan
kara.scroggs@ryan.com