A big thank you to all that joined us and participated. Please visit our webinars section to find links to upcoming CPE Webinars for CPAs. For those that weren’t able to attend the live version, the recording and transcript are available below in its entirety:

**AI-Enhanced Transcript: Cost Segregation Essentials – High-Impact Tax Planning for CPAs**

Presented by:
Eric Tuthill, CPA, MAcc – Tax Director, Corporate Tax Advisors
Mark Weber – Senior Cost Segregation Manager, Corporate Tax Advisors

This transcript has been lightly edited and AI-enhanced for clarity and flow while preserving the integrity and detail of the original live presentation hosted by CPA Academy. The video presentation is embedded below for reference.

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**Moderator Introduction:**

Hello everyone, and welcome to another great webinar from CPA Academy. Thank you for joining us today!

My name is Gabe, and I’ll be your moderator for this session: “Cost Segregation Essentials: High-Impact Tax Planning for CPAs.” Our presenters today are Eric Tuthill and Mark Weber, and we’re looking forward to an informative and engaging presentation.

Before we begin, let’s go over a few quick housekeeping notes and conduct a brief technical check. Please open the Q&A tab in your control panel and let us know if you can hear my voice and see the title slide. While you’re there, feel free to let us know one thing you hope to learn from today’s webinar. That same Q&A tab is where you can ask questions and share comments throughout the session.

I see attendees joining us from California, Florida, New Jersey, and Iowa—welcome!

**CPE & CE Credit Information**

This webinar qualifies for:
– 1 CPE credit
– 1 CE credit (for PTIN holders, uploaded later to the IRS)

To earn CPE credit:
– Stay logged in for at least 55 minutes
– Answer at least 3 out of 4 polling questions

The webinar is being recorded. The archive, along with your credit and handouts, will be available in your CPA Academy account within 24 hours. If you get disconnected, don’t worry—the webinar software will track your time accurately. You can also download the presentation materials now via the Handouts tab in your control panel.

Now that everything is up and running, let’s turn things over to our presenters—Eric and Mark.

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**Eric Tuthill, CPA:**

Thanks so much for the introduction, Gabe. Hello everyone!

Let me start by giving you a quick overview of who I am. My name is Eric Tuthill, and I’m a Tax Director at Corporate Tax Advisors. I’m a Certified Public Accountant (CPA) and hold a Master’s in Accounting. Before joining CTA, I owned and operated my own tax firm, which I eventually sold—so I’ve sat in your seat and understand what it’s like to manage client expectations while navigating complex tax planning strategies.

I’ve built today’s presentation from that perspective: what would I want to know if I were a CPA trying to learn how to use cost segregation for tax planning?

There are three core questions this webinar will answer:

1. How much money does cost segregation actually save taxpayers?
2. How does cost segregation work?
3. Who qualifies—and how can you plan proactively for them?

How Much Does Cost Segregation Really Save Taxpayers?

Before we answer that question, it’s important to lay a foundation for what cost segregation actually is. Many CPAs and tax professionals are already familiar with the benefits of accelerated and bonus depreciation—powerful tools used to maximize deductions for clients. A common example might be depreciating a vehicle to create immediate tax savings by front-loading deductions under Section 168(k), the bonus depreciation provision.

Cost segregation applies this same principle to real estate—but with far greater impact.

In a typical real estate investment, properties are depreciated over either 27.5 years (residential) or 39 years (commercial). Cost segregation breaks down the components of a property and identifies assets that can be depreciated over shorter recovery periods—specifically, 15-year property for land improvements and 5-year property for tangible personal property. By reclassifying these components, you make them eligible for bonus depreciation, often allowing the taxpayer to expense a significant portion of the property in the first year.

While some might argue that this only creates a timing difference—accelerating deductions into the present rather than the future—it can still produce enormous value. When used strategically, cost segregation can be combined with other tax incentives, such as a Section 1031 exchange, to defer or even eliminate future tax consequences. The result is enhanced flexibility and liquidity without necessarily increasing long-term tax exposure.

And let’s be honest—most taxpayers aren’t focused on their tax liability five or ten years from now. They care about what they can save this year. Cost segregation addresses that concern directly. It’s especially powerful for clients facing large current-year tax liabilities—something many are dealing with as they extend their returns past the April 15th deadline. For those taxpayers, a properly executed cost segregation study can turn a hefty tax bill into a manageable or even negligible one.

Cost Segregation as a Mid-Year Tax Rescue Strategy

One of the greatest advantages of cost segregation is its ability to correct course after a tough tax season. For clients who found themselves facing an unexpected tax liability around the April 15th deadline, this strategy offers a second chance. It’s an opportunity to revisit those difficult conversations and provide a proactive solution that can significantly reduce what’s owed in the current year.

When we conduct a cost segregation study, we typically apply a simple rule of thumb: between 5% and 10% (or more) of the building’s basis can be converted into immediate or near-term cash flow. This doesn’t refer to the total deduction—rather, it’s the actual tax savings after applying an assumed 30% tax rate. The deduction itself is often much higher.

To apply this in practice, take the building’s basis from the depreciation schedule and apply the 5–10% range. That gives you a ballpark estimate of the potential tax savings a client can expect to realize through accelerated depreciation. It’s a powerful metric that helps taxpayers clearly understand the value of taking action now rather than waiting.

Of course, there are important considerations—chief among them, the passive activity loss rules governed by Form 8582. Not all taxpayers will be able to immediately use the deduction, depending on how their income is classified. If the activity is passive and there’s no offsetting passive income, the losses may be suspended and carried forward until the property is sold or until the taxpayer generates qualifying passive income.

However, there are planning techniques available to maximize the immediate benefit. For example, qualifying as a real estate professional or making a grouping election can allow the taxpayer to treat the activity as non-passive—unlocking the ability to use those losses against active or other types of income.

Perhaps most importantly, cost segregation isn’t limited to newly acquired properties. Even properties that have been held for several years are eligible for this treatment through a change in accounting method and a §481(a) adjustment. That means portfolio clients sitting on older buildings can still reap the benefits in the current tax year—without amending prior returns.

Real-World Scenarios: Cost Seg Can Dramatically Reduce a Taxpayer’s Burden

In my own experience as a tax practitioner, I can recall several clients—many with 10 or 15 residential rentals or commercial properties—who would suddenly find themselves in a difficult tax position. A client might call in a panic after hearing they owe $40,000 or more in taxes. Naturally, that news never goes over well. You do your best to calm them down by reminding them that owing tax means they had a profitable year, but let’s be honest—that’s not exactly comforting when they’re staring down a massive bill.

That’s when we turn to cost segregation as a strategic tool. In cases like this, we often recommend extending the return to buy some time. Then we take a second look at their depreciation schedules. If the client owns multiple rental properties with depreciable assets, we can often apply a few well-timed cost segregation studies to unlock significant deductions using a §481(a) adjustment and a change in accounting method. This is one of the most powerful applications of cost segregation—it allows us to unlock deductions in the current year without needing to amend prior returns.

Case Study #1: Small Rental Property ($500,000 Purchase)

To bring this to life, let’s look at a real-world example. Imagine a $500,000 rental property—something like a small apartment complex. Typically, we’d allocate 20% to land, leaving $400,000 for the building basis. Without a cost segregation study, you’d be stuck with a slow and steady 27.5-year depreciation schedule. That gives you a first-year deduction of just under $14,000—not exactly exciting.

With a cost segregation study, we break down that $400,000 into three categories:

• • $286,000 remains in long-life structural assets (27.5-year property)

• • $77,000 is reclassified as 15-year land improvements (think paving and landscaping)

• • $36,000 becomes 5-year tangible personal property (carpeting, light fixtures, etc.)

Assuming a 40% bonus depreciation rate for 2025, the first-year deduction jumps to over $62,000—with more than $45,000 coming from accelerated depreciation alone. If bonus depreciation returns to 100%, as it did under the Tax Cuts and Jobs Act, the first-year deduction climbs even higher to roughly $123,000.

That’s a huge leap in cash flow potential. Even at a conservative 30% tax rate, this translates to $15,000 to $33,000 in actual tax savings—all from a single property. And these reallocation percentages (25–30%) are quite typical in practice, so this example reflects real, actionable numbers.

Case Study #2: Large Commercial Property ($10 Million Purchase)

Now let’s scale up. Say you’re working with a $10 million commercial property, like an office building. We’d allocate around $2 million to land, leaving $8 million in building basis.

Without cost segregation, you’d claim around $280,000 in depreciation in year one under the 39-year schedule. But with a study, we could reclassify:

• • $4.6 million to long-life structural assets

• • $1.5 million to 15-year land improvements (parking lots, fencing, exterior lighting)

• • $1.8 million to 5-year personal property (decorative lighting, flooring, etc.)

Now, applying the 40% bonus depreciation rate, you get $1.3 million of bonus in the first year. Combined with standard depreciation, the first-year deduction totals $1.7 million—a staggering increase over the original $280,000. That alone delivers nearly $500,000 in tax savings at a 30% rate. If bonus depreciation returns to 100%, the deduction could exceed $3.4 million, equating to almost $1 million in year-one tax savings.

The Bigger Picture: Bonus Depreciation’s Legislative Future

These examples underscore the broad applicability of cost segregation—from small rentals to multi-million-dollar commercial buildings. Even under the current 40% bonus depreciation rate, it remains a high-impact strategy. But if bonus depreciation is restored to 100%—a likely scenario given the political momentum to reinstate it—these savings could be even more substantial.

We often talk with clients who are staring down large tax bills, and cost segregation gives them a path forward. With proper planning, especially for properties placed in service in 2024 or earlier (when bonus depreciation was 60%, 80%, or even 100%), the benefits can be enormous.

Unlocking Past Opportunities: The Power of §481(a) for Older Properties

One of the most overlooked benefits of cost segregation is its application to previously acquired properties—especially those placed in service more than three years ago. Traditionally, tax professionals think of older properties as a closed case for depreciation planning. But with cost segregation and the use of a §481(a) adjustment via an automatic accounting method change, that’s simply not true.

Even if a property was placed in service five or six years ago, the taxpayer can still accelerate depreciation into the current tax year without amending prior returns. This is especially critical for clients dealing with high current-year liabilities. It gives you a tool to reach into the past and pull tax savings forward—offering flexibility that most tax strategies can’t match.

As Mark Weber, our Senior Cost Segregation Manager, often notes, the majority of the properties we study are already owned. Many of our clients bought buildings in 2020, 2021, or 2022—when 100% bonus depreciation was still in effect. The good news? We can still take full advantage of that incentive retroactively using proper method change procedures.

Cost Segregation Has Deep Legal Roots

Once we’ve addressed how much cost segregation can save taxpayers, the next logical question is: Is this strategy legitimate and well-supported? The answer is a resounding yes—and there’s a long legal and regulatory history behind it.

The landmark case that solidified the use of cost segregation was Hospital Corporation of America v. Commissioner, which confirmed that components of a building could be separately classified and depreciated over shorter lives if they were not considered part of the structural whole. This decision paved the way for identifying personal property and land improvements within real estate holdings and opened the door to accelerated depreciation on a much broader scale.

But the foundation runs deeper. Many CPAs will recognize IRC §263A, the Uniform Capitalization (UNICAP) rules, which have long dictated what must be capitalized in connection with real and tangible property. While UNICAP rules were once cumbersome—especially for mid-tier firms—the Tax Cuts and Jobs Act relaxed certain provisions. However, the core principle remains: understanding what is and isn’t capitalizable is essential in tax planning.

Depreciation Classifications That Enable Planning

Beyond UNICAP, cost segregation is built on established tax law distinctions like:

• • Section 1250 property – Real property, generally subject to slower depreciation and ordinary income recapture on disposition.

• • Section 1245 property – Tangible personal property, eligible for accelerated depreciation and bonus treatment.

These classifications date back to the 1950s and 60s and were further expanded under President Reagan’s Tax Reform Act of 1986, which introduced MACRS (Modified Accelerated Cost Recovery System) under §168. This system formalized depreciation lives of 5, 7, 15, and 39 years, forming the backbone of modern cost segregation.

Today, most practitioners are familiar with §168(k)—the provision for bonus depreciation. But the strategic planning doesn’t end there.

Grouping Elections: A Hidden Gem for Active Use

One of the most powerful (and underutilized) tools in cost segregation planning is the Treasury Regulation §1.469-4, which allows grouping of activities. This is especially helpful for clients who own both their operating business and the real estate it occupies. By grouping the real estate activity with the business activity—so long as there is common ownership—they can often convert passive losses into ones that can offset active income.

For example, a manufacturer who owns the facility in a separate LLC can elect to group the rental activity with the operating business, enabling depreciation from the real estate to offset business income. This is a game-changing strategy for mitigating taxes without needing to reconfigure legal structures.

These rules date back to 1992 but were reinforced in 1999 when the IRS formally recognized cost segregation as a valid method of accounting—providing even more credibility to the practice.

Legal Precedent and IRS Guidance Supporting Cost Segregation

Much of the legitimacy behind cost segregation as a tax strategy stems from a pivotal court case: Hospital Corporation of America v. Commissioner. This landmark ruling gave formal recognition to the idea that various components within a building could be classified differently for depreciation purposes. It established that personal property, land improvements, and structural components could be separately identified and depreciated on shorter lives—paving the way for the modern cost segregation study.

Beyond case law, the IRS has provided procedural support through automatic method change procedures—most notably via Form 3115 and §481(a) adjustments. These procedures allow taxpayers to change their method of accounting for depreciation on assets placed in service in prior years—sometimes five or six years ago—and “catch up” on the missed depreciation in the current year. This is especially valuable for assets that are beyond the typical statute of limitations for refunds.

The key advantage here is that taxpayers don’t need to amend past returns. The IRS allows this as an automatic change, which streamlines compliance and opens up planning opportunities for older properties that may have been overlooked.

Understanding What Makes a Valid Study

The IRS has also issued direct guidance on how cost segregation should be approached through its Cost Segregation Audit Techniques Guide (ATG). This publication outlines the characteristics of a high-quality, defensible study and helps practitioners understand how to avoid red flags that could trigger scrutiny.

While cost segregation is not formally classified as an engineering study, the IRS strongly recommends an engineering-based approach. This means that studies should be prepared by individuals with relevant expertise in construction, engineering, or tax law—people who can accurately assess and allocate building components using established costing methods.

Core Elements of a Reliable Cost Segregation Study

To ensure your study withstands IRS review, here are several hallmarks of a strong cost segregation engagement:

1. 1. Thorough Documentation Review
      A credible study begins with a deep dive into project records—such as construction invoices, blueprints, contractor bids, and cost breakdowns. This allows for a detailed understanding of the property and its components.

1. 1. Site Inspection
      One of the most critical differentiators between a strong and weak study is an in-person site visit. Auditors frequently ask whether a site visit was performed and who conducted it. Physical inspections help verify the existence and classification of assets and support the study’s conclusions with photographs, measurements, and field notes.

1. 1. Accurate Asset Classification
      Every component in the property must be properly categorized into its corresponding MACRS life—whether it falls into 5-, 15-, or 39-year property. This involves distinguishing between personal property (Section 1245), land improvements, and real property (Section 1250).

1. 1. Citations and Legal Support
      High-quality studies reference appropriate tax code sections, IRS rulings, and court cases (such as Hospital Corp. of America). These references bolster the technical foundation of the study and signal to the IRS that the conclusions are well-reasoned.

1. 1. Transparent Methodology
      The cost estimation method—whether it’s the cost approach or the unit-in-place method—must be clearly documented. Studies should show exactly how values were assigned to components using industry-standard tools like RSMeans or similar databases.

When all these elements are in place, the resulting study is not only optimized for tax savings—it’s also built to stand up to IRS examination. As we’ll explore further, this is especially important in a compliance environment where “DIY cost seg” services may fall short of expectations.

What Makes a Cost Segregation Study Truly Reliable?

The most reliable cost segregation studies are those performed by engineers who take the time to physically inspect the property. These professionals conduct thorough site visits, review architectural plans, verify the presence of assets, and document their findings through photos and measurements. In fact, in the rare audits we’ve seen, the IRS’s first question is almost always: “Was a site visit performed, and by whom?” That tells you just how seriously they take this aspect of the process.

Once the physical inspection is complete, the next critical step is accurate asset classification. Every building component must be properly sorted into the correct MACRS category—whether that’s 5-, 7-, 15-, or 39-year property. This distinction between personal property, real property, and land improvements forms the backbone of the study and must be clearly documented in the final report.

A strong cost segregation study doesn’t just rely on technical observations. It also includes appropriate legal and regulatory citations—ranging from Internal Revenue Code sections (like §1245 and §1250), to court cases like Hospital Corporation of America v. Commissioner, and of course, IRS guidance from the Cost Segregation Audit Techniques Guide. This not only adds credibility to the study, but also helps ensure that it withstands IRS scrutiny.

The Cost Approach: Estimating Value with RSMeans

A vital part of any defensible study is the cost approach, which estimates the value of each component based on what it would cost to replace it using today’s construction materials and labor rates. Think about the cost of a 2×4 or the labor to install cabinets—those are the granular details that matter.

To ensure reliable valuations, many studies—including ours—rely on RSMeans Construction Cost Data, a well-respected industry standard. The cost approach begins with the total construction cost or purchase price of the property. From there, each element of the property is analyzed and its replacement cost determined using RSMeans. The result is a breakdown that allocates the overall cost into the appropriate depreciation categories: 5-year, 15-year, and 39-year property.

Why This Process Matters for Tax Savings

Let’s say RSMeans data indicates a replacement cost of $1.3 million for a property. If $600,000 of that total falls under 5- and 15-year categories, those percentages can then be used to proportionally allocate the original purchase price to the appropriate depreciation buckets. This creates a well-supported, audit-ready basis for claiming bonus depreciation on shorter-lived components.

From a CPA’s perspective, this allocation method is particularly helpful. Even without an engineering background, you can confidently explain to clients how their cost segregation study was built on a trusted methodology, using real-world replacement costs to estimate values and assign depreciation schedules.

The Value of an Engineer-Led Approach

At Corporate Tax Advisors, one of our key differentiators is our team of experienced engineers. We currently have five or six engineers on staff, including experts in construction and energy incentives like the Section 179D deduction. These professionals go out in the field, walk through properties, and meticulously document materials—right down to the number of cabinet units or square yards of concrete paving.

This is more than just technical rigor—it’s strategic tax defense. According to the IRS Audit Techniques Guide, studies performed by construction engineers who conduct site inspections are the most accurate, and therefore, the least likely to be challenged or delayed during an audit.

In short, when engineers lead the study and tie every component back to a clearly defined methodology, you get the best of both worlds: maximum tax savings and ironclad audit protection.

Identifying the Right Clients for Cost Segregation and Maximizing Its Strategic Impact

At this point, we’ve covered how much cost segregation can save, the legal and procedural foundations behind it, and what makes a study reliable. But the final—and arguably most important—step is identifying the right taxpayers for this strategy and tailoring it to maximize their benefit.

As tax professionals, this means looking through your client list and asking: Who can truly benefit from accelerating depreciation in the current year? Often, this includes taxpayers with large current-year liabilities, clients planning for major events like asset sales, or those facing capital gains. For instance, if a client sold a rental property or exited a business and anticipates a taxable gain in 2025, a cost segregation study could dramatically reduce or eliminate that tax burden.

Strategic Tax Planning with Historic Properties

One of the most powerful aspects of cost segregation is that it doesn’t only apply to newly acquired properties. Through an automatic accounting method change and a §481(a) adjustment, even properties placed in service well over three years ago can be used to generate deductions today. This bypasses the traditional limitation on refunds due to the statute of limitations for amending returns.

This makes cost segregation a critical tool in planning around capital gains or passive income. For example, if a client sold a rental property, or expects significant income from a business or investment in the coming year, depreciation deductions from cost segregation can be used to offset those gains—especially when the income qualifies as passive or when the taxpayer qualifies as a real estate professional.

Coupling Cost Seg with Section 1031 Exchanges

Even when the taxpayer plans to sell the property in a few years, cost segregation can still be advantageous. The depreciation can be accelerated in the current year to offset tax liabilities, and the property can later be exchanged using a Section 1031 exchange into a new property—rolling over the basis and continuing the deferral. High-net-worth taxpayers often use this strategy to defer taxes over multiple generations, borrowing against equity and avoiding realization events, with the ultimate goal of achieving a step-up in basis when the property is passed on to heirs.

Passive Loss Limitations and Real Estate Professionals

Of course, one of the main constraints in utilizing depreciation is the passive activity loss rules under Form 8582. These rules can restrict a taxpayer from using the deduction unless they have passive income to offset it. But there are ways to plan around this.

Taxpayers who qualify as real estate professionals can treat rental losses as non-passive, allowing those deductions to offset active income. The threshold to qualify as a real estate professional isn’t insurmountable, and it remains one of the most effective planning techniques to unlock the full value of cost segregation.

At Corporate Tax Advisors, we provide free assessments to determine whether your clients meet the criteria and how cost segregation might apply to their specific situation.

Grouping Elections for Self-Rental Properties

Another powerful strategy lies in grouping elections under Treasury Regulation §1.469-4. Many clients—such as dentists, doctors, or manufacturers—own both a business and the building it operates in, often housed in separate legal entities for liability protection. These are classic self-rental scenarios.

With the appropriate election, you can group the rental and the operating business into one activity. This allows the depreciation from the rental property to offset the income from the active trade or business. For example, a manufacturer that owns its facility through an LLC can use this election to apply accelerated depreciation from cost segregation directly against the operating business income.

In Summary

Cost segregation isn’t just a depreciation tool—it’s a strategic weapon when applied correctly. Whether the client is facing a significant tax bill, planning for a future gain, or trying to maximize long-term wealth-building, cost segregation offers multiple avenues for savings—especially when integrated with real estate professional status, grouping elections, and long-term tax deferral strategies.

Qualifying as a Real Estate Professional: Key to Unlocking Cost Segregation Benefits

To fully unlock the benefits of cost segregation—particularly when it comes to using depreciation deductions to offset active income—it’s crucial to understand the real estate professional (REP) rules under the IRS passive activity loss limitations.

Not everyone who owns rental properties qualifies, but the test isn’t as difficult to meet as many think.

The Core Requirements

To qualify as a real estate professional, a taxpayer must meet two main criteria:

1. 1. More than 50% of all personal services performed during the tax year must be in real property trades or businesses.

1. 1. The taxpayer must spend at least 750 hours per year materially participating in those real estate activities.

These activities can include development, construction, acquisition, conversion, rental, operation, management, leasing, and brokerage services. What many taxpayers don’t realize is that any one of these functions can count toward the 750-hour threshold.

A crucial benefit of this classification is that only one spouse needs to meet the REP requirements for the couple to claim the benefit on a joint return. For instance, if one spouse is a high-earning professional (e.g., a physician) and the other is a full-time realtor, the depreciation from cost segregation can offset the physician’s W-2 income—an incredibly powerful planning opportunity.

Aggregating Activities for Maximum Benefit

In most cases, real estate professionals own multiple properties. To meet the 750-hour test across a portfolio, the taxpayer must make an aggregation election to group all real estate activities into one “activity” for purposes of material participation. This election must be attached to the taxpayer’s return each year.

This grouping simplifies compliance and makes it easier to meet the 750-hour and material participation thresholds across multiple properties. Without it, each property must meet the tests individually, which is much harder to achieve.

Documentation and Substantiation

If a taxpayer has no other job, substantiating REP status is relatively straightforward—they can argue that real estate is their full-time occupation. However, if the taxpayer has another occupation (e.g., software developer, consultant), the IRS is far more likely to scrutinize the claim.

In those cases, it’s essential to keep contemporaneous time logs documenting real estate-related activities. The logs should include details such as dates, hours spent, tasks performed, and the properties involved. This documentation is especially important when the taxpayer is trying to prove that real estate work comprises more than 50% of their total working hours.

Active vs. Passive Participation Tests

In addition to REP status, a taxpayer must also materially participate in the real estate activity for it to be considered “non-passive.” The IRS provides several tests, and passing just one is sufficient:

• • 500-hour test: The taxpayer participates for more than 500 hours during the year.

• • Substantially all test: The taxpayer does substantially all the work related to the property.

• • 100-hour test + more than anyone else: The taxpayer participates for over 100 hours, and no one else (including contractors or property managers) participates more.

• • Significant participation activity: The taxpayer participates in multiple activities that each meet a threshold, totaling over 500 hours across the board.

• • 5 of the last 10 years test: The taxpayer materially participated in real estate for any 5 of the last 10 years.

• • Personal service activity test: The taxpayer materially participated in a personal service activity for at least 3 prior years.

These rules are especially valuable when grouping multiple properties. If participation across all properties adds up to over 500 hours, the taxpayer can be considered active—even if individual properties wouldn’t qualify on their own.

Special Considerations for Large Commercial Property Owners

When working with large-scale property owners—those holding substantial commercial buildings or apartment complexes—it’s critical to understand how Section 163(j) impacts interest expense deductions.

Originally introduced as part of the Tax Cuts and Jobs Act, Section 163(j) limits the deductibility of business interest expense to 30% of adjusted taxable income (ATI). For large property owners who exceed certain gross receipts or asset thresholds, this limitation can become a significant issue.

To avoid this cap, eligible taxpayers can elect out of the 163(j) limitation. However, doing so comes with a tradeoff: they must use the Alternative Depreciation System (ADS) for certain property classes. ADS extends the recovery period for certain assets, which can reduce near-term depreciation deductions.

Fortunately, bonus depreciation is still available for 5- and 15-year property even under ADS. This means that even large commercial taxpayers using ADS can still benefit from accelerated deductions via cost segregation—especially for personal property and land improvements.

The Cost Segregation Process at Corporate Tax Advisors

At Corporate Tax Advisors, we follow a structured, client-focused approach to delivering cost segregation studies:

1. 1. Preliminary Analysis
      We begin with a no-cost review of the client’s depreciation schedules and basic property information. This includes identifying potential passive loss issues or opportunities for §481(a) adjustments. We provide an estimated tax savings range to help advisors evaluate whether a study is worthwhile.

1. 1. Engagement and Documentation
      Once the client agrees to proceed, we collect more detailed documentation, such as blueprints, cost breakdowns, or construction invoices. We also schedule a site visit, where our engineers inspect and document all relevant building components.

1. 1. Engineering and Report Preparation
      Our engineering team performs a detailed cost analysis using RSMeans data and applies the cost approach to allocate values across 5-, 15-, and 39-year property. We compile the data into a comprehensive report, outlining allocations and estimated tax savings.

1. 1. Final Delivery and Integration
      We deliver the completed cost segregation report along with all required tax documentation, including the Form 3115 and §481(a) adjustment as needed. We also stand behind our work with audit defense through appeals, ensuring clients have full support in the event of IRS inquiry.

Common Questions and Special Use Cases

During the Q&A portion of the webinar, attendees asked about personal service activities and cost segregation for short-term rentals like Airbnbs. These are nuanced areas but can absolutely qualify when structured correctly.

• • Personal Service Activities
    These are trades or businesses where the principal asset is the reputation or skill of employees (e.g., CPAs, lawyers, consultants). In real estate, “personal services” relevant to STRs (like Airbnbs) may include concierge-style offerings—massages, guided tours, meals, or other enhanced guest services. General cleaning and maintenance typically don’t qualify.

• • Short-Term Rentals
    Cost segregation can work well for STRs, especially when the taxpayer qualifies for material participation or can treat the activity as an active trade or business. The goal is to avoid having the deductions trapped as passive losses under Form 8582.

If structured correctly, STRs can yield powerful tax benefits, particularly when high-income individuals are seeking additional deductions.

Final Thoughts and Contact Information

Cost segregation offers tremendous opportunities—not only to reduce current tax liabilities but to integrate into long-term wealth planning strategies like 1031 exchanges and estate planning via step-up in basis.

At Corporate Tax Advisors, we provide free preliminary assessments to evaluate the tax impact for your clients and assist throughout the process, including documentation, filing, and audit defense.

If you have questions or would like to discuss a specific property, reach out to us anytime. We’re here to help you deliver results to your clients with confidence.