Cost Segregation for Manufacturing Facilities: What It Is and When It Pays

An engineering-based study reviews construction documents, drawings and the property, classifying components by function and assigning each its appropriate recovery period. Production-supporting components move to shorter classes while the building shell stays in its 39-year class.

The resulting depreciation, including any prior-year catch-up reported as a change in accounting method, accelerates allowable deductions without changing the total amount of depreciation the property will eventually produce.

Process electrical and plumbing, equipment-specific foundations and pads, specialized flooring, and other components that serve production rather than the building envelope. The classification must be supportable, which is why the study is engineered rather than estimated.

Land is never depreciable, and the building shell itself generally remains 39-year property, which keeps the study's claims honest.

For new construction, recent acquisitions and major renovations, where the basis is clean and the placed-in-service date is recent. Current law's depreciation provisions for capital investment change over time, and cost segregation positions the facility to use whatever provisions apply.

Manufacturers planning a build or purchase should raise cost segregation during acquisition planning, when the structure of the purchase is still being decided.