When buyers evaluate an acquisition, they typically focus on purchase price, working capital adjustments, and overall tax structure. All three are important. But if you have clients who are considering transactions involving owned real estate, leasehold improvements, or production facilities, depreciation may actually drive more after‑tax cash flow for them than the purchase price, the working capital adjustments, the overall tax structure or any other “headline” terms.
Under current law, the ability to accelerate depreciation, sometimes into an immediate deduction, can materially affect deal economics. Yet depreciation planning is still frequently treated as a post‑close exercise. In today’s environment, that approach can mean leaving real value on the table or, worse, unintentionally giving it away through the deal documents themselves.
Don’t let this happen to your clients.
Cost Segregation Is No Longer a Marginal Planning Tool
At its core, cost segregation is an engineering‑based analysis that identifies commercial building components and improvements that qualify for shorter recovery periods than the default 27.5 year or 39‑year lives applied to real property. Depending on the facts, site improvements, specialty electrical and plumbing, dedicated mechanical systems, decorative finishes, and equipment‑related buildout may be reclassified as faster-depreciating property with a five-year, seven‑year, or 15‑year life.
That acceleration has always mattered. Current bonus depreciation rules may transform long-tail depreciation into a current-year cash-flow event. In acquisition planning, that distinction can significantly change the after‑tax return profile of a transaction, particularly when a meaningful portion of the purchase price is attributable to improvements embedded in owned real estate.
Why Current Tax Rules Change the Conversation
Under current Section 168(k) guidance, eligible property that’s acquired and placed in service after Jan. 19, 2025, generally qualifies for 100% additional first‑year depreciation—subject to the applicable timing, acquisition, and election rules. For qualifying assets, the benefit of a cost segregation study is no longer limited to accelerating deductions over several years. In the right fact pattern, it may produce an immediate deduction.
That generosity comes with structure, however. Acquisition date rules still apply. Written binding contract rules still apply. Elections still matter. Your clients may also elect a reduced bonus percentage in the first taxable year ending after Jan. 19, 2025, if that better aligns with their broader tax posture. Bottom line: the system is favorable, but it is not casual. You and your clients must identify the right property, document the right facts, and make the right elections on the right return.
Real World Example
In Peco Foods v. Commissioner, T.C. Memo. 2012‑18, a major poultry producer (Peco Foods) acquired poultry processing plants through asset purchases and agreed to specific purchase price allocation schedules reported on Form 8594. After closing, Peco commissioned a cost segregation study and attempted to subdivide portions of those allocations further into shorter‑lived property. However, the court did not allow it and Peco was held to the allocation framework reflected in the transaction documents.
The significance of the Peco Foods case is often misunderstood. The case did not undermine cost segregation as a methodology. Instead, it clarified that a cost segregation study cannot contradict what the parties have already fixed in their deal documents. A cost seg study may refine what is left flexible, but it cannot rewrite an agreed‑upon allocation.
Quite simply, purchase agreement language is part of the depreciation strategy. If flexibility is important, it must be preserved before closing. It cannot be manufactured afterward.
Three Issues Buyers Should Address During Diligence
When a client’s potential acquisition involves meaningful real estate or improvements, they should address depreciation planning during diligence—not after signing. Make sure you and your client have considered three important questions:
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Will the transaction be reported as a Section 1060 asset acquisition requiring both parties to file Form 8594?
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Do the proposed allocation schedules or asset definitions lock assets into categories that limit later component‑level analysis?
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Does the nature of the property suggest a meaningful opportunity for shorter‑lived classification or immediate expensing under current law?
These are not academic questions. They go directly to whether the tax value is being preserved or inadvertently surrendered through drafting choices.
You clients should also think beyond initial cost segregation studies. Fixed‑asset setup after closing matters. Internal consistency between the purchase agreement, the tax return, and the depreciation schedules also matters. That alignment of purchase agreement and tax planning is critical not only to capturing the benefit, but also to defending it.
QPP Adds a Second Layer for Production Businesses
For buyers acquiring manufacturing, refining, or other production‑oriented facilities, depreciation planning now includes a second, potentially more powerful, analysis. Section 168(n) provides a temporary 100% special depreciation allowance for qualified production property (QPP).
Unlike traditional cost segregation, which typically reclassifies components within a building, QPP may apply to qualifying nonresidential real property if the statutory requirements are met and if the election is made properly. That result can be significant, but it is neither automatic nor universal.
The timing rules are precise. Construction generally must begin after January 19, 2025, and before January 1, 2029. The property generally must be placed in service after July 4, 2025, and before January 1, 2031. The property must be depreciated under Modified Accelerated Cost Recovery System (MACRS), not under the Alternative Depreciation System (ADS). Original use generally must commence with new owner unless a specific used‑property rule applies. Your client must designate the property through an election made on their federal income tax return.
Missing any of those thresholds can eliminate the deduction entirely.
Integral Use Is Often the Real Constraint
In practice, the most challenging QPP issue is not timing—it is use. Only the portion of a building that’s being used as an integral part of the owner’s qualified production activity is eligible. Offices, administrative functions, lodging, parking, sales areas, research, software development, engineering, and other unrelated uses are excluded.
If production occurs only in part of a facility, which is common, only that portion qualifies as QPP unless the 95% de minimis rule is satisfied and properly elected. Mixed‑use properties therefore require careful, physical mapping. The analysis is based on how the space is actually used, not on how the facility is described.
Filing Mechanics Matter More Than Many Expect
Several procedural items deserve special attention as well. In Section 1060 asset acquisitions, both buyer and seller generally must file Form 8594 with their income tax returns for the year of sale. That form becomes part of the permanent tax record, framing the allocation narrative.
If depreciation classification is addressed late and requires a method change, Form 3115 may be the procedural remedy under the automatic change rules. Also note that 3115, while useful, does not cure poorly drafted acquisition documents.
Finally, elections matter. Bonus depreciation elections are made with a timely filed return, including extensions. QPP elections must specifically identify the nonresidential real property and the portion of that property that’s designated as QPP and are likewise made on the return for the applicable year. When these filings are treated as clerical afterthoughts, taxpayers often discover too late that they were central to the planning all along.
Cost segregation should no longer be viewed as a post‑close compliance exercise. Under current law, it is part of your client’s transaction planning. The same is true for QPP in production‑oriented acquisitions.
Buyers who address depreciation early—while allocations are still being negotiated and facts are still being documented—preserve their flexibility, model their benefits accurately, and take tax positions consistently. Buyers who wait until after closing may find that the agreement, the return position, or the physical use of the property has already narrowed the path.
In today’s environment, depreciation planning is not just about class lives. It’s about transaction discipline.
