When it comes to reducing your tax liability and improving cash flow, cost segregation and Section 179 are two of the most powerful tools available to business owners and real estate investors. But what happens when you combine them? Let’s break down how these two tax incentives work together and how your business could benefit.

Quick Takeaways:

• Cost segregation accelerates depreciation by identifying components of real property (like special electric and plumbing, land improvements or lighting) that can be written off over shorter periods, boosting upfront tax deductions.
• Section 179 allows for immediate expensing of eligible property improvements, up to $2.5 million in 2025, with a phase-out beginning at $4M, providing faster tax savings in the year assets are placed in service.
• Used together, these strategies can significantly reduce tax liability, especially when combined with bonus depreciation for non-qualifying or excess costs.

What Is Cost Segregation?

Cost segregation is a tax planning strategy that allows companies to accelerate depreciation deductions on certain components of real property. Rather than depreciating an entire building over the standard 27.5 or 39 years, a cost segregation study identifies portions of the property (such as lighting, flooring, cabinetry, and land improvements) that can be depreciated over shorter lives (5, 7, or 15 years).

This reclassification leads to front-loaded tax deductions, which free up cash sooner, which is especially beneficial for growing businesses and property owners.

What Is Section 179?

Section 179 of the Internal Revenue Code allows businesses to immediately expense qualifying equipment and property in the year it’s placed in service, up to an annual limit. For 2025, the deduction limit is $2.5 million, with a phase-out beginning at $4 million.

While Section 179 was originally designed for tangible personal property like machinery and vehicles, it has been expanded to include certain real property improvements, such as:

• Qualified leasehold improvements
• Roofing
• HVAC systems
• Fire protection and alarm systems
• Security systems

How Cost Segregation and Section 179 Work Together

When a cost segregation study is performed, it identifies assets that qualify for shorter depreciation lives, many of which are also eligible for Section 179 expensing.

Here’s how the two strategies complement each other:

1. Identification of Eligible Assets

A cost segregation study breaks down a building into various components. Some of these components (like electrical systems or carpeting) may be eligible for Section 179 if they meet the requirements.

2. Immediate Expense Under Section 179

Once identified, Section 179 can be used to fully expense the cost of qualifying components in the same tax year, up to the IRS limit. This means no waiting period for depreciation; you deduct it now. Generally, states follow federal depreciation under S179, whereas most states do not allow for bonus depreciation (see below). 

3. Bonus Depreciation Complements the Strategy

For assets that don’t qualify for Section 179 or exceed the deduction limit, bonus depreciation (currently at 40% in 2025 under old law, increased back to 100% for assets acquired and placed in service after January 19, 2025) may be applied. This creates a layered, highly efficient approach to asset depreciation.

A Real-World Example

Let’s say your business purchases a commercial building for $3 million. A cost segregation study identifies $600,000 worth of assets with 5-, 7-, or 15-year lives.

• Due to taxable income limitations, $400,000 of those assets qualify for Section 179 and are immediately expensed.
• The remaining $200,000 is eligible for bonus depreciation.

Total first-year federal deduction: $600,000
That’s $600,000 of tax deductions in year - one instead of being spread over nearly four decades.

Who Benefits Most?

This strategy is particularly effective for:

• Real estate investors and developers
• Medical and dental practices
• Restaurants and franchise operators
• Manufacturers and distributors
• Warehousing and logistics companies
• Professional services firms purchasing office space

Key Considerations

• Timing matters: Property must be placed in service during the tax year.
• Limits apply: Be aware of the Section 179 cap and phase-out threshold.
• Professional analysis is key: Not all property qualifies, and IRS scrutiny can be high.

The Bottom Line

Cost segregation and Section 179 are not mutually exclusive strategies; they’re even more powerful together. By identifying the right assets and applying the right tax treatments, your business can unlock significant upfront tax savings, improve cash flow, and reinvest in growth.

If you’ve recently purchased, constructed, or renovated a building, now is the time to explore this opportunity.

Cost Segregation and Section 179 FAQs

1. Does my business need to own the building to use cost segregation?

   No. While ownership helps, tenants who have made qualifying leasehold improvements may also benefit from a cost segregation study, particularly when Section 179 expensing is involved.

2. Can I use both Section 179 and bonus depreciation in the same year?

   Yes. You can apply Section 179 first to eligible assets, and then use bonus depreciation for any remaining cost basis or for assets that don’t qualify under Section 179.

3. How do I know which components qualify for shorter depreciation or Section 179?

   A professional cost segregation study is essential. It breaks down property into individual components and determines what qualifies under IRS rules for accelerated depreciation or immediate expensing.

4. What if I renovated an existing property? Do these rules still apply?

   Yes. Renovations may qualify for Section 179 or accelerated depreciation through cost segregation.