The law behind your study.

Peco Foods, Inc. v. Commissioner

T.C. Memo 2012-18, aff'd 522 Fed. App'x 840 (11th Cir. 2013)

U.S. Tax Court

IRS won

The court held Peco was bound by the written allocations it had agreed to. A buyer in a §1060 'applicable asset acquisition' who agrees in writing to a purchase-price allocation cannot later use a cost-seg study to contradict those agreed values. The case did not say cost segregation is barred on purchased buildings, only that you cannot re-trade an allocation you signed.

Norwest Corp. & Subs. v. Commissioner

111 T.C. 105 (1998)

U.S. Tax Court

Rev. Proc. 87-56 sets up two kinds of classes: asset classes (00.11 through 00.4) for specific assets used in all business activities, and activity classes (01.1 through 80.0) for assets used in specific industries. The Tax Court held that an item described in both an asset class and an activity class is classified in the asset class, unless the activity class specifically includes it.

Deseret Management Corp. v. United States

112 Fed. Cl. 438 (2013)

U.S. Court of Federal Claims

Mixed result

Most assets (flooring, ceilings, general HVAC, general electrical distribution) were structural components (Section 1250) on the 39-year schedule. But air-conditioning equipment whose sole justification was cooling the broadcasting equipment, not the occupants, was Section 1245 personal property under the sole-justification test.

AmeriSouth XXXII, Ltd. v. Commissioner

T.C. Memo 2012-67

U.S. Tax Court

Mixed result

The court denied roughly $1.08 million of reclassifications for lack of proof and let only the well-supported items, like dryer vents and dryer gas lines, move to shorter lives. The rest stayed 27.5-year residential rental property. The loss was about evidence, not about whether cost segregation is allowed.

PPL Corporation & Subsidiaries v. Commissioner

135 T.C. 176 (2010) (135 T.C. No. 8)

U.S. Tax Court

Taxpayer won

The Tax Court held street light assets are neither assets used in the distribution of electricity for sale nor land improvements, so they fit neither class 49.14 nor class 00.3. With no class life, they are 7-year property under section 168(e)(3)(C)(ii).

Trentadue v. Commissioner

128 T.C. 91 (2007)

U.S. Tax Court

Mixed result

Vineyard trellises counted as depreciable farm equipment, not permanent structures. Wells and underground irrigation counted as 15-year land improvements. The court applied the permanence factors to operational evidence and credible testimony, without demanding original construction invoices.

Clajon Gas Co., L.P. v. Commissioner

354 F.3d 786 (8th Cir. 2004), rev'g 119 T.C. 197 (2002)

U.S. Court of Appeals, 8th Circuit

Taxpayer won

The Eighth Circuit reversed. Following Duke Energy and Saginaw Bay, it held the gathering systems belong in asset class 13.2 with a 7-year recovery period. Splitting identical assets into different classes based on the owner's producer status would create an inconsistent depreciation regime.

PDV America, Inc. & Subs. v. Commissioner

T.C. Memo 2004-118

U.S. Tax Court

Taxpayer won

The Tax Court applied the Whiteco permanence factors to decide whether the disputed tanks were inherently permanent structures, and held the storage tanks at issue belonged in asset class 57.0 with the 5-year recovery period, rejecting the IRS's 15-year class 57.1 position. The IRS had already conceded class 57.0 for its smaller tanks (5,000 barrels or less).

Saginaw Bay Pipeline Co. v. United States

338 F.3d 600 (6th Cir. 2003)

U.S. Court of Appeals, 6th Circuit

Taxpayer won

The Sixth Circuit reversed. It adopted the Tenth Circuit's Duke Energy analysis and held the lines were gathering pipelines within asset class 13.2, depreciable over 7 years, because they serve the production process.

Brookshire Brothers Holding, Inc. & Subs. v. Commissioner

T.C. Memo. 2001-150, aff'd, 320 F.3d 507 (5th Cir. 2003)

U.S. Tax Court, aff'd 5th Cir.

Taxpayer won

Both the Tax Court and the Fifth Circuit ruled for Brookshire Brothers. Moving property to a shorter recovery period is not a Section 446 accounting method change. It falls within a regulatory exception. No prior IRS consent was required.

O'Shaughnessy v. Commissioner

332 F.3d 1125 (8th Cir. 2003), rev'g in part 2002-1 USTC para 50,235 (D. Minn. 2001)

U.S. Court of Appeals, 8th Cir.

Taxpayer won

The Eighth Circuit reversed the district court. A MACRS recovery-period reallocation falls within the regulatory exemption for adjustments in useful life. It is not a Section 446(e) method change requiring IRS consent. The net result favored the taxpayer.

Kurzet v. Commissioner

222 F.3d 830 (10th Cir. 2000)

U.S. Court of Appeals, 10th Cir.

IRS won

The Tenth Circuit agreed with the IRS. Changing a recovery period from 31.5 years to 15 years is a change in accounting method requiring IRS consent under Section 446(e). The taxpayer had not gotten consent. The change did not stand.

L.L. Bean, Inc. v. Commissioner

145 F.3d 53 (1st Cir. 1998), aff'g T.C. Memo 1997-175

U.S. Court of Appeals, 1st Circuit

IRS won

A rack system that was integrated into and held up part of the building was real property. The court drew the line between racks that are part of the structure and racks you can simply remove.

Hospital Corp. of America v. Commissioner

109 T.C. 21 (1997)

U.S. Tax Court

Taxpayer won

The Tax Court held that the old investment-credit tests still work for sorting a building into §1245 and §1250 parts under modern depreciation law, and that the component-depreciation ban does not stop a taxpayer from identifying personal property embedded in a building. The court did its analysis from plans, documents, and engineering testimony.

SuperValu Inc. v. United States

993 F. Supp. 1243 (D. Minn. 1997)

U.S. District Court, District of Minnesota

Taxpayer won

Supermarket refrigeration systems qualified as personal property, not structural components of the store.

Duke Energy Natural Gas Corp. v. Commissioner

109 T.C. 416 (1997), rev'd 172 F.3d 1255 (10th Cir. 1999)

U.S. Tax Court, rev'd by U.S. Court of Appeals, 10th Circuit

Taxpayer won

The Tenth Circuit reversed. Gathering systems fit asset class 13.2, assets used in exploring for and producing petroleum and natural gas, with a 7-year recovery period. The asset's primary use and the plain words of the class descriptions controlled, not whether the owner was a producer.

Walgreen Co. & Subs. v. Commissioner

T.C. Memo 1996-374, on remand from 68 F.3d 1006 (7th Cir. 1995), rev'g 103 T.C. 582 (1994)

U.S. Tax Court

Mixed result

The court went component by component. Many generic interior buildout items (drywall partitions, ceilings, doors) stayed structural real property, while decorative finishes, signage, canopies, and branded trade-dress items qualified as personal property.

Boddie-Noell Enterprises v. United States

36 Fed. Cl. 722 (1996), aff'd 132 F.3d 54 (Fed. Cir. 1997)

U.S. Court of Federal Claims

IRS won

The court held that parts the regulations expressly list as buildings or structural components stay real property, and items serving the general running of the building are not personal property. It also said a quality study must be 'both accurate and well documented.' Estimates built on guesses without supporting records cannot carry a reclassification.

La Petite Academy, Inc. v. United States

95-1 USTC ¶50,193 (W.D. Mo. 1995), aff'd 72 F.3d 133 (8th Cir. 1995)

U.S. District Court, Western District of Missouri

IRS won

Most of the daycare building parts were structural components and stayed real property. Items that serve the general building, even ones styled for children, did not become personal property.

Albertson's, Inc. v. Commissioner

38 F.3d 1046 (9th Cir. 1994), rev'g T.C. Memo 1988-582, cert. denied 516 U.S. 807 (1995)

U.S. Court of Appeals, 9th Circuit

IRS won

HVAC that exists for general comfort is a structural component: real property, not personal property.

Schrum v. Commissioner

T.C. Memo. 1993-124, aff'd in part & vacated in part, 33 F.3d 426 (4th Cir. 1994), on remand T.C. Memo. 1995-103, aff'd in part & vacated in part, 114 F.3d 1177 (4th Cir. 1997)

U.S. Tax Court, two rounds 4th Cir.

Mixed result

The car wash facility structure stayed in Section 1250. The portions of plumbing and electrical that directly served the car wash equipment were allowed as Section 1245 personal property. The IRS Audit Technique Guide notes that Schrum follows A.C. Monk and does not represent the predominant view across circuits.

Grinalds v. Commissioner

T.C. Memo. 1993-66 (65 T.C.M. (CCH) 1971)

U.S. Tax Court

IRS won

The taxpayer lost on every item. A/C units, cubicle partitions, interior walls, restroom plumbing, and electrical conduit and receptacles were all held structural components under Section 1250. The IRS also issued an Action on Decision addressing the A/C-unit investment tax credit point.

Texas Instruments Inc. v. Commissioner

T.C. Memo 1992-306

U.S. Tax Court

Mixed result

Process-support gear in a high-tech plant qualified as personal property. General building systems and permanent structures stayed real property. The case is cited by the IRS alongside Morrison for extending functional allocation to equipment-serving systems.

Morrison, Inc. v. Commissioner

891 F.2d 857 (11th Cir. 1990), aff'g T.C. Memo 1986-129

U.S. Court of Appeals, 11th Circuit

Mixed result

Restaurant parts were judged by what they actually do. Decorative items and kitchen-process gear qualified as personal property, and the appeals court approved allocating dual-use systems between the share serving equipment and the share serving the building.

McManus v. United States

700 F. Supp. 994 (W.D. Wis. 1987), aff'd, 863 F.2d 491 (7th Cir. 1988)

U.S. District Court (W.D. Wis.), aff'd 7th Cir.

IRS won

The taxpayer lost. The hangar and all its integral components were structural components under Section 1250, not personal property. The 7th Circuit affirmed. Note: some summaries of this case list the disputed items as Section 1245; that reflects what was claimed, not what was allowed.

Metro National Corp. v. Commissioner

T.C. Memo 1987-38

U.S. Tax Court

Mixed result

Going part by part, movable drywall partitions, certain lighting, and removable cabinets qualified as personal property. Restroom partitions, false ceilings, and sprinklers stayed real property.

Illinois Cereal Mills, Inc. v. Commissioner

T.C. Memo 1983-469, aff'd 789 F.2d 1234 (7th Cir. 1986), cert. denied 479 U.S. 995 (1986)

U.S. Court of Appeals, 7th Circuit

Taxpayer won

The Seventh Circuit affirmed allocating the electrical distribution system between personal property and building property based on use, upholding a 95%/5% split in the taxpayer's favor on the facts.

Piggly Wiggly Southern, Inc. v. Commissioner

803 F.2d 1572 (11th Cir. 1986)

U.S. Court of Appeals, 11th Circuit

Taxpayer won

On those facts, the grocery HVAC qualified as personal property because it served the refrigeration process. The win is fact-specific: the taxpayer proved the equipment-serving purpose. The IRS has noted its disagreement (nonacquiescence) and reads this line of cases narrowly.

Munford, Inc. v. Commissioner

87 T.C. 463 (1986), aff'd, 849 F.2d 1398 (11th Cir. 1988)

U.S. Tax Court, aff'd 11th Cir.

Mixed result

The refrigerated storage area and its cooling pipes, insulation, valves, and motors qualified as Section 1245 personal property. The truck and rail loading platforms did not. They were structural components on the slow schedule. The 11th Circuit affirmed.

Duaine v. Commissioner

T.C. Memo 1985-39

U.S. Tax Court

Mixed result

Per the IRS Pub 5653 case table: the foundation slab, the kitchen wall and floor tiles, and the interior and exterior ornamental lighting fixtures stayed section 1250 real property, while the plumbing, gas lines, and electrical conduits serving specific kitchen equipment qualified as section 1245 personal property.

Mallinckrodt, Inc. v. Commissioner

778 F.2d 402 (8th Cir. 1985), aff'g T.C. Memo 1984-532

U.S. Court of Appeals, 8th Circuit

IRS won

The Eighth Circuit affirmed the Tax Court: the gypsum drywall partitions were structural components of the building, section 1250 real property, not tangible personal property eligible for the investment credit.

Shoney's South, Inc. v. Commissioner

T.C. Memo 1984-413

U.S. Tax Court

Taxpayer won

Per the IRS Pub 5653 case table: the chandeliers, lanterns, and hanging lanterns qualified as section 1245 personal property. The IRS later non-acquiesced on the decorative lighting point in AOD 1986-48, meaning it disagreed with the result but did not pursue it.

Consolidated Freightways, Inc. v. Commissioner

708 F.2d 1385 (9th Cir. 1983), aff'g in part and rev'g in part 74 T.C. 768 (1980)

U.S. Court of Appeals, 9th Circuit

IRS won

Per the IRS Pub 5653 case table: the truck loading docks, dock overhead doors, and dock lighting were all structural components, that is, section 1250 real property. The dock structures counted as buildings even though they lacked permanent walls.

A.C. Monk & Co. v. United States

686 F.2d 1058 (4th Cir. 1982)

U.S. Court of Appeals, 4th Circuit

Mixed result

Industrial facility parts were classified using a test focused on whether the item was specially adapted to the business process. Some items qualified as personal property under that approach. The Fourth Circuit's adaptability emphasis is its own. Other courts weigh permanence and function differently.

Circle K Corp. v. Commissioner

T.C. Memo. 1982-298

U.S. Tax Court

IRS won

The taxpayer lost on both items. The cold storage rooms and the roof-mounted A/C units were structural components under Section 1250. In a retail sell-not-process setting, the sole-justification exception did not apply.

Samis v. Commissioner

76 T.C. 609 (1981)

U.S. Tax Court

IRS won

The cogeneration plant was a structural component of the apartment buildings, not Section 38 property and not Section 179 tangible personal property. The plant existed to serve the buildings' HVAC and hot water functions. Its physical location outside the buildings did not change the analysis.

Scott Paper Co. v. Commissioner

74 T.C. 137 (1980)

U.S. Tax Court

Taxpayer won

When an electrical system serves both factory machines and the building itself, you can split it based on a load analysis. The share that runs production equipment can be personal property; the share that runs the building stays real property.

Westroads, Inc. v. Commissioner

69 T.C. 682 (1978), acq. (A.O.D. 1979-173)

U.S. Tax Court

Taxpayer won

The electrical power generating equipment qualified as Section 1245 tangible personal property. The IRS acquiesced in Action on Decision 1979-173.

Whiteco Industries, Inc. v. Commissioner

65 T.C. 664 (1975)

U.S. Tax Court

Taxpayer won

The court held the billboards were not inherently permanent, so they qualified as tangible personal property, and it set out six questions, now called the Whiteco factors, for deciding whether something is truly permanent. Being attached to the land does not, by itself, make a part permanent.

Weirick v. Commissioner

62 T.C. 446 (1974)

U.S. Tax Court

Mixed result

The Tax Court looked at each component on its own. It held the line towers qualified for the investment credit because they worked as part of the lift machinery, not as an inherently permanent structure. The earthen passenger ramps did not qualify.

Thirup v. Commissioner

508 F.2d 915 (9th Cir. 1974)

U.S. Court of Appeals, 9th Circuit

Taxpayer won

The Ninth Circuit reversed. It rejected the appearance test and applied a functional test: a greenhouse whose principal function is providing the controlled growing environment for the crop, where human activity inside is incidental, is not a 'building' under section 48, so the investment credit was allowed.

The Kramertown Co., Inc. v. Commissioner

T.C. Memo. 1972-239, aff'd, 488 F.2d 728 (5th Cir. 1974)

U.S. Tax Court, aff'd 5th Cir.

IRS won

The taxpayer lost. The rooftop heating and A/C units were structural components under Treas. Reg. 1.48-1(e)(2). Removability alone does not make property personal. Weight, location, and capacity all pointed to structural status. The 5th Circuit affirmed.

King Radio Corp. v. United States

486 F.2d 1091 (10th Cir. 1973)

U.S. Court of Appeals, 10th Cir.

Taxpayer won

The ceiling-height partitions, glazed partitions, and movable partition systems qualified as tangible personal property, not structural components. The 10th Circuit affirmed the taxpayer's refund, following Minot Federal.

Central Citrus Co. v. Commissioner

58 T.C. 365 (1972)

U.S. Tax Court

Mixed result

Blowers, coolers, transformers, and dedicated electrical serving the sweet rooms qualified as Section 38 tangible personal property. Their sole justification was the controlled-atmosphere process. The main power panel, step-down transformer, and general lighting did not qualify. They served the building generally.

Minot Fed. Sav. & Loan Ass'n v. United States

313 F. Supp. 294 (D.N.D. 1970), aff'd, 435 F.2d 1368 (8th Cir. 1970)

U.S. District Court (D.N.D.), aff'd 8th Cir.

Taxpayer won

The pre-manufactured movable partition systems and door units qualified as tangible personal property. They were not permanent. They could be detached and relocated. The 8th Circuit affirmed.

Catron v. Commissioner

50 T.C. 306 (1968)

U.S. Tax Court

Mixed result

Parts of one building were split by what they were used for. The refrigerated rooms qualified as personal property; the sorting and boxing rooms stayed real property.

Commissioner v. Danielson

378 F.2d 771 (3d Cir. 1967), cert. denied, 389 U.S. 858 (1967)

U.S. Court of Appeals, 3d Cir.

IRS won

The Danielson rule: a party who signs an express contractual allocation of purchase price is bound by it for tax purposes. You cannot reallocate on your tax return later, unless you can prove fraud, duress, or a mistake of fact. Only the IRS, not the taxpayer, may challenge the agreed-upon allocation. The Supreme Court declined to hear the case.

Shainberg v. Commissioner

33 T.C. 241 (1959)

U.S. Tax Court

Taxpayer won

The Tax Court sided with the owner. When separate component costs are documented, each component can depreciate at its own rate. The IRS's single-composite-life argument was rejected. Rev. Rul. 66-111 later limited this to newly constructed property only.

Stine, LLC v. United States

2015 WL 403146 (W.D. La. Jan. 27, 2015), nonacq., A.O.D. 2017-02

U.S. District Court (W.D. La.)

Taxpayer won

The court ruled for the taxpayer. Placed in service means the property is in a state of readiness for its intended function. A certificate of occupancy and employees stocking shelves showed the buildings were ready. Being open to customers is not required. The IRS formally disagreed with the ruling (A.O.D. 2017-02, nonacquiescence), meaning it will fight this in other courts.

Notice 2026-11 (OBBBA Bonus Guidance)

IRS Notice 2026-11

IRS notice

Interim guidance: taxpayers apply rules consistent with Treas. Reg. 1.168(k)-2 and 1.1502-68, substituting January 19, 2025 for September 27, 2017 (and January 20, 2025 for September 28, 2017) each place they appear, and 100 percent for the applicable percentage. It also covers the section 168(k)(5) election, the amended 40-percent (60-percent for long-production property) 168(k)(10) election, the component election, and qualified sound recording productions. Taxpayers may rely on it until forthcoming proposed regulations are published.

Notice 2026-16 — Interim Guidance on 168(n) Qualified Production Property

IRS Notice 2026-16 (issued Feb. 20, 2026)

IRS notice

Notice 2026-16 provides interim guidance on the new IRC Section 168(n) election for Qualified Production Property. It defines qualified production activities (manufacturing, production, and refining; excluding packaging, labeling, and minor assembly), explains the integral-part requirement, sets out the 95% de minimis rule, describes how to allocate basis between qualifying and non-qualifying portions, covers begin-construction rules, explains election mechanics, and details the 10-year Section 1245 recapture rule. Taxpayers may rely on the notice until proposed regulations are issued.

IRS Cost Segregation Audit Technique Guide (Pub 5653)

IRS Publication 5653, Feb 2025 revision

IRS administrative guidance

This is the IRS playbook for how a cost segregation study should be done and reviewed. It lays out the methods the IRS accepts, the records a study needs, and the 13 study elements plus 9 report elements a quality study must hit. It also carries the IRS's own case tables, matching specific building parts to the court decisions that classified them.

Rev. Proc. 2025-23

Rev. Proc. 2025-23, 2025-24 I.R.B. 1481

IRS revenue procedure

The current annual list of automatic accounting method changes under Rev. Proc. 2015-13. Effective for Form 3115 filings made on or after June 9, 2025. Amplifies, modifies, and supersedes in part Rev. Proc. 2024-23. Includes depreciation reclassification changes and disposition changes used in cost segregation filings.

IRS Pub. 5653, Ch. 3: The Six Cost Segregation Approaches

IRS Pub. 5653 (2-2025), Ch. 3 — Cost Segregation Approaches

IRS audit technique guide

Chapter 3 of Publication 5653 ranks six ways to prepare a cost segregation study from most reliable to least. At the top is a detailed engineering study built from actual cost records. Second is a detailed engineering cost estimate using published cost data. Below those are three less precise methods and, at the bottom, the rule-of-thumb approach, which the IRS views with caution.

IRS Pub. 5653, Ch. 4: The 13 Elements of a Quality Study

IRS Pub. 5653 (2-2025), Ch. 4 — Principal Elements of a Quality Study

IRS audit technique guide

Chapter 4 of Publication 5653 lists 13 elements a quality cost segregation study must show. These include an expert preparer, a detailed methodology, appropriate documentation, interviews, common nomenclature, standard numbering, a legal analysis, unit costs with engineering take-offs, organized asset lists, a reconciliation to actual costs, proper treatment of indirect costs, a list of Section 1245 property, and handling of related issues. Examiners grade every study against this checklist.

IRS Pub. 5653, Ch. 4: The 9 Elements of a Quality Report

IRS Pub. 5653 (2-2025), Ch. 4 — Principal Elements of a Quality Report

IRS audit technique guide

Chapter 4 of Publication 5653 specifies nine elements a quality cost segregation report must include: a summary letter, a narrative report, a schedule of assets, a schedule of direct and indirect costs, a schedule of property units and their costs, a description of the engineering procedures, a statement of assumptions and limiting conditions, a certification by the preparer, and exhibits. Examiners check for all nine during risk analysis.

IRS Pub. 5653, Ch. 5: How the IRS Reviews a Study

IRS Pub. 5653 (2-2025), Ch. 5 — Review and Examination of a Study

IRS audit technique guide

Chapter 5 of Publication 5653 lays out three phases an IRS examiner follows when auditing a cost segregation study: initial risk analysis, examination, and other considerations. Studies that satisfy the Chapter 4 quality standards are described as lower risk and draw less examiner attention. Flags include mixed asset types, deviations from Revenue Procedure 87-56, and missing Chapter 4 elements.

IRS Pub. 5653, Ch. 7: Industry-Specific Classification Matrices

IRS Pub. 5653 (2-2025), Ch. 7 — Industry Specific Guidance

IRS audit technique guide

Chapter 7 of Publication 5653 provides IRS-approved asset classification matrices for seven industries: retail, restaurants, pharmaceuticals and biotech, casinos and gaming, auto dealerships, auto manufacturing, and residential rental properties. Chapter 2 of the same guide states that when a study's classifications match the applicable matrix, examiners should not make adjustments.

IRS Pub. 5653, Ch. 8A: Electrical Distribution System Allocation

IRS Pub. 5653 (2-2025), Ch. 8A — Electrical Distribution System

IRS audit technique guide

Chapter 8A of Publication 5653 approves the functional allocation approach for splitting a building's electrical distribution system between Section 1245 personal property and Section 1250 structural components. The chapter states that when a taxpayer properly uses this approach, the allocation should not be challenged and no adjustments are necessary.

ATG Ch. 6.E — The Inherently Permanent Standard

IRS Pub. 5653 (2-2025), Ch. 6.E — Inherently Permanent Standard

IRS administrative guidance

Chapter 6.E of the IRS Cost Segregation Audit Techniques Guide explains the inherently permanent test. That test draws the line between Section 1245 personal property (faster write-off) and Section 1250 structural components (slower write-off). If a building part is inherently permanent, it is structural. If it is not, it can be treated as personal property. The chapter traces this standard across Sections 168, 263A, and 199, and anchors it in Hospital Corp. of America.

ATG Ch. 6.C — MACRS Depreciation Overview

IRS Pub. 5653 (2-2025), Ch. 6.C — Depreciation Overview

IRS administrative guidance

Chapter 6.C of the IRS Cost Segregation Audit Techniques Guide summarizes the MACRS depreciation framework as it applies to cost segregation. It covers the main recovery periods (5, 7, 15, 27.5, and 39 years), the three depreciation methods (200DB, 150DB, and straight-line), the three timing conventions (half-year, mid-quarter, mid-month), and cross-references to Rev. Proc. 87-56 class lives. It also connects reclassification to bonus depreciation under Section 168(k) and expensing under Section 179.

Rev. Proc. 2024-23

2024-23 I.R.B. 1334

IRS revenue procedure

The list of accounting method changes the IRS approves automatically. Section 6.01 (change number 7) is the standard cost-seg change from a wrong depreciation method to a right one. Section 6.12 (change number 200) covers regrouping inside MACRS. The IRS refreshes this list about once a year (Rev. Proc. 2025-23 is the most recent update), and the change numbers carry forward.

Rev. Proc. 2023-24 — Updated List of Automatic Method Changes

Rev. Proc. 2023-24, 2023-31 I.R.B. 484

IRS revenue procedure

Rev. Proc. 2023-24 is the annual master list of automatic accounting-method changes under Sections 446 and 481. It superseded Rev. Proc. 2022-14 and included 29 significant modifications, including clarifications for depreciation method changes involving credit-bearing property. It was later superseded by Rev. Proc. 2024-23 and then Rev. Proc. 2025-23.

IRM 4.11.6, Examining Officers Guide: Depreciation Method Changes

IRM 4.11.6 — Examining Officers Guide: Changes in Accounting Methods

IRS internal revenue manual

IRM 4.11.6 governs how examiners review depreciation method changes under Sections 167, 168, and 197. A retroactive cost segregation study applied to prior years without a Form 3115 is an impermissible method change. Voluntary changes use the automatic procedures in Revenue Procedure 2015-13 and Form 3115.

Rev. Proc. 2020-25 (QIP Catch-Up)

2020-19 I.R.B. 785

IRS revenue procedure

Confirms QIP placed in service after December 31, 2017 is 15-year MACRS property (straight-line) with a 20-year ADS recovery period, and is bonus-eligible when the section 168(k) and Reg. 1.168(k)-2 requirements are met. For tax years ending in 2018, 2019, or 2020 it allowed the catch-up by amended return or AAR (time-limited window) or by automatic Form 3115 method change, and allowed late elections, revocations, or withdrawals under sections 168(g)(7), (k)(5), (k)(7), and (k)(10).

Rev. Proc. 2020-50

Rev. Proc. 2020-50, 2020-48 I.R.B. 1109

IRS revenue procedure

Provides procedures for applying the T.D. 9916 final bonus regulations to property placed in service in 2017 through 2020, including the component election under Treas. Reg. 1.168(k)-2(c). Also provides procedures to revoke prior Section 168(k)(7) opt-out elections.

Rev. Proc. 2019-33

Rev. Proc. 2019-33, 2019-34 I.R.B. 662

IRS revenue procedure

Allowed late elections or revocations of Section 168(k)(5), (7), and (10) elections for property placed in service after September 27, 2017. This gave taxpayers a second chance to make or change bonus depreciation elections after the TCJA expanded 100% bonus to used property.

CCA 201805001 — Section 6701 Penalty for Inflated Cost-Seg Study

Chief Counsel Advice 201805001 (Feb. 2, 2018)

IRS administrative guidance

A cost segregation consultant who made serious misrepresentations in a study, overstating how much of a building counted as personal property to inflate the taxpayer's deductions, was subject to a Section 6701 aiding-and-abetting penalty. The memo is non-precedential but signals how the IRS views inflated studies.

Rev. Proc. 2017-33

Rev. Proc. 2017-33, 2017-19 I.R.B. 1236

IRS revenue procedure

Provides the time-and-manner rules for making and revoking the Section 168(k)(5) specified-plant election (orchards, vineyards, and other specified plants). Includes a 6-month automatic extension for revoking the election.

A.O.D. 2017-02 (Stine Nonacquiescence)

A.O.D. 2017-02 (Apr. 13, 2017)

IRS action on decision

The IRS formally disagreed with the Stine, LLC v. United States decision from the Western District of Louisiana. That court held that a building not yet open for business could still be placed in service once substantially complete. The IRS will not follow that standard outside that one court and will keep arguing against it.

Rev. Proc. 2015-13

2015-5 I.R.B. 419

IRS revenue procedure

Spells out the general rules for changing a tax accounting method, including the consent process and how the §481(a) catch-up adjustment is taken. A negative catch-up (extra depreciation you were owed) is generally taken all at once in the year of change.

Rev. Proc. 2015-14

Rev. Proc. 2015-14, 2015-5 I.R.B. 450

IRS revenue procedure

Provides the definitive list of automatic accounting method changes, with each change's scope, terms, and Section 481(a) treatment. It is the operational companion to Rev. Proc. 2015-13. Practitioners find the specific change number for the impermissible-to-permissible depreciation change here when filing a retroactive cost segregation Form 3115.

Rev. Proc. 2014-54

2014-41 I.R.B. 675

IRS revenue procedure

Gives the steps for making a partial disposition election under Treas. Reg. §1.168(i)-8(d), so you can write off the leftover value of a part you tear out and replace.

Rev. Proc. 2011-42 (Statistical Sampling)

2011-37 I.R.B. 318

IRS revenue procedure

Sets out an IRS-blessed way to use statistical sampling in tax computations. It was written for other areas of tax, but the same sampling logic is persuasive for large cost-seg jobs.

Rev. Proc. 2011-14

Rev. Proc. 2011-14, 2011-4 I.R.B. 330

IRS revenue procedure

Amplified and superseded Rev. Proc. 2008-52 as the exclusive automatic method-change procedure. Allowed multiple concurrent depreciation changes on a single Form 3115 and moved most copy-filing to Ogden, Utah. Its Section 6.01 is the primary change number for the impermissible-to-permissible depreciation change used in retroactive cost segregation studies.

Rev. Proc. 2011-26

Rev. Proc. 2011-26, 2011-16 I.R.B. 664

IRS revenue procedure

Provides the time-and-manner rules for making and revoking elections under the 100% and 50% bonus rules created by the Tax Relief Act of 2010. Also includes a Section 280F safe harbor for certain vehicles.

Rev. Proc. 2008-52

Rev. Proc. 2008-52, 2008-36 I.R.B. 1

IRS revenue procedure

Consolidated all automatic accounting method changes into a single procedure with one master appendix listing every automatic change and its terms, including all depreciation changes. It was the exclusive automatic-consent vehicle for cost segregation reclassifications from 2008 to 2011.

Notice 2008-25 (GO Zone Bonus Recapture)

Notice 2008-25, 2008-9 I.R.B.

IRS notice

This notice explains the recapture rules for the 50% bonus deduction available for Gulf Opportunity Zone property under Section 1400N(d). It specifies when a recapture event occurs. That happens when GO Zone property is disposed of or stops being used in the GO Zone.

Notice 2007-36

Notice 2007-36, 2007-17 I.R.B.

IRS administrative guidance

Provides guidance on the 50% additional first-year depreciation allowed under Section 1400N(d) for qualified Gulf Opportunity Zone property. Addresses original-use requirements and within-zone versus outside-zone placed-in-service rules.

Rev. Proc. 2004-11

Rev. Proc. 2004-11, 2004-3 I.R.B. 311

IRS revenue procedure

Modified Rev. Proc. 2002-9 to extend automatic consent for depreciation method changes to property that has already been disposed of, and waived the two-year rule of Rev. Rul. 90-38 for certain depreciation changes. Conformed to Treas. Reg. 1.446-1T(e)(2)(ii)(d).

Chief Counsel Notice CC-2004-007 — Cost-Seg Reclassification Not a Method Change

Chief Counsel Notice CC-2004-007 (Jan. 28, 2004)

IRS Chief Counsel Notice

The IRS changed its litigating position: a reclassification of depreciable property from a cost segregation study (for example, moving an asset from 39-year to 5 or 15-year MACRS) is NOT a change in method of accounting under Section 446(e). No Form 3115 consent is required, and the taxpayer may file amended returns for open years.

Rev. Rul. 2003-54 (Gas Pump Canopies)

2003-1 C.B. 982

IRS revenue ruling

Applying the Whiteco factors, the canopies are not inherently permanent structures; they are tangible personal property in asset class 57.0 of Rev. Proc. 87-56 (5-year recovery period under section 168(a), 9-year under ADS). The supporting concrete footings are inherently permanent structures classified as land improvements in asset class 57.1 (15-year recovery period, 20-year ADS). A change to conform is a method of accounting change under sections 446 and 481.

Rev. Rul. 2003-81

Rev. Rul. 2003-81, 2003-2 C.B. 126

IRS revenue ruling

When an asset could be classified under both an asset category and an activity category in Rev. Proc. 87-56, the asset category governs, unless the asset is specifically excluded from the asset category or specifically included in the activity category. The asset category is the higher-priority rule.

Rev. Rul. 2002-9 (Impact Fees)

2002-1 C.B. 614

IRS revenue ruling

Impact fees incurred in connection with the construction of a new residential rental building are capitalized costs allocable to the building under sections 263(a) and 263A (indirect costs of production), not allocable to the land. The fees are then depreciated under section 168 as part of the building beginning when the building is placed in service. Conforming changes are method changes under sections 446 and 481.

Rev. Proc. 2002-9

Rev. Proc. 2002-9, 2002-1 C.B. 327

IRS revenue procedure

Listed cost segregation reclassifications among the automatic accounting method changes under Section 446(e). A taxpayer could move a component from 39-year to 5- or 7-year class without advance IRS approval by filing Form 3115. The catch-up was a Section 481(a) deduction in the year of change.

Rev. Proc. 2002-19

Rev. Proc. 2002-19, 2002-1 C.B. 696

IRS revenue procedure

Set the timing rule for Section 481(a) catch-up adjustments. A negative (taxpayer-favorable) adjustment is taken in full in the year of change. A positive (taxpayer-unfavorable) adjustment is spread over four years. This rule is now incorporated into Rev. Proc. 2015-13.

Rev. Rul. 2001-60 (Land Preparation, Contemporaneous-Retirement Test)

Rev. Rul. 2001-60, 2001-51 I.R.B. 587

IRS revenue ruling

Land preparation costs tied to improvements that will be retired at the same time as those improvements are depreciable over the recovery period of the associated assets. The ruling calls this the contemporaneous-retirement test. Land prep with no retirement event, such as push-up golf greens, stays non-depreciable. This ruling modifies and supersedes Rev. Rul. 55-290.

A.O.D. 1999-008 (HCA acquiescence)

A.O.D. 1999-008, 1999-2 C.B. xvi

IRS administrative guidance

The IRS acquiesced in part to the Hospital Corporation of America decision. The IRS accepted the core principle that Investment Tax Credit era tests for identifying tangible personal property apply when classifying building components under modern MACRS. Component-level depreciation is a valid approach. The IRS reserved the right to dispute specific asset classifications in future cases.

CCA 199921045 — Cost-Seg Documentation Standards

Chief Counsel Advice 199921045 (Apr. 1, 1999)

IRS administrative guidance

The IRS endorses cost segregation studies as a valid method of allocating construction costs to Section 1245 personal property, citing the Hospital Corporation of America case. But the memo is also a warning: an accurate study may not rest on non-contemporaneous records, reconstructed data, or unsupported taxpayer estimates. Contemporaneous cost records are required.

Rev. Proc. 99-49

Rev. Proc. 99-49, 1999-2 C.B. 725

IRS revenue procedure

Provided automatic consent for depreciation method changes for tax years 1999 and 2000, including a 1998 transition, with a four-year Section 481(a) framework for both over- and under-depreciation corrections.

Rev. Proc. 98-60

Rev. Proc. 98-60, 1998-2 C.B. 761

IRS revenue procedure

Expanded automatic consent to cover both under-depreciation and over-depreciation corrections, applying a symmetric four-year Section 481(a) framework to both favorable and unfavorable adjustments.

Rev. Proc. 97-27

Rev. Proc. 97-27, 1997-1 C.B. 680

IRS revenue procedure

Sets out the non-automatic (advance consent) procedures for changing a method of accounting under Section 446(e), including depreciation changes. A negative Section 481(a) adjustment, meaning extra deductions owed to the taxpayer, is spread over four years under the non-automatic path.

Rev. Proc. 97-37

Rev. Proc. 97-37, 1997-2 C.B. 455

IRS revenue procedure

Provided automatic consent for taxpayers to change from impermissible to permissible depreciation methods, adopting a four-year Section 481(a) spread for IRS-favorable adjustments. It was the second major link in the automatic method-change chain.

Rev. Proc. 96-31

Rev. Proc. 96-31, 1996-1 C.B. 714

IRS revenue procedure

Provided automatic consent for a taxpayer who claimed less depreciation than allowable to change to the correct method. The full catch-up amount (the Section 481(a) adjustment) was taken in the year of change via Form 3115, with no amended returns needed.

Rev. Proc. 92-20

Rev. Proc. 92-20, 1992-1 C.B. 685

IRS revenue procedure

The IRS gave automatic consent for the first time to a taxpayer who claimed less depreciation than allowable to change to the correct method using a Section 481(a) catch-up adjustment. No advance ruling was needed for this correction.

Rev. Proc. 87-56

1987-2 C.B. 674

IRS revenue procedure

Sets the official MACRS asset classes and their depreciation lives. General asset classes (00.11 through 00.4) cover assets used in any business; activity classes (01.1 through 80.0) cover assets used in specific industries. For example, asset class 00.3 covers land improvements at a 15-year life, and class 57.0 covers distributive trades and services at 5 years.

Rev. Proc. 87-57

1987-2 C.B. 687

IRS revenue procedure

Prescribes the mechanics of the MACRS depreciation computation and, in section 8, supplies the optional depreciation tables: year-by-year percentage rates applied to unadjusted basis for each combination of depreciation system, method, recovery period, and convention.

Rev. Rul. 80-127

Rev. Rul. 80-127, 1980-1 C.B. 53

IRS revenue ruling

When an asset is specifically excluded from a general activity guideline class, it must be placed in the more specific asset guideline class that covers it. Shipping containers have their own asset class (00.27) and are explicitly excluded from the water-transportation activity class (44.0), so the specific class controls.

TAM 7941002 — Engineering-Based Study / Documentation Standard

TAM 7941002 (June 25, 1979)

IRS Technical Advice Memorandum

Third-party cost analysis is a proper method for allocating costs to building components. The study must be performed by qualified personnel who are competent in building design, construction methods, cost estimating, and auditing. Whether a component is personal property or a structural component is a factual question that must be resolved by looking at the actual property and supporting the conclusion with real evidence.

Rev. Rul. 77-476

Rev. Rul. 77-476, 1977-2 C.B. 5

IRS revenue ruling

Asset classification under the ADR and MACRS guideline system is determined by the taxpayer's primary trade or business, not by how a particular asset is used. An oil pipeline owned by an electric utility falls in the electric utility asset class, not the oil and gas class, because selling electricity is the company's primary business.

Rev. Rul. 75-178

Rev. Rul. 75-178, 1975-1 C.B. 9

IRS revenue ruling

Items that are not permanently attached to land and not a permanent part of a building may qualify as Section 1245 tangible personal property. The analysis turns on two criteria: whether the item is attached to land or built permanently into the structure, and whether it can be removed without destroying the building.

Rev. Rul. 73-410

Rev. Rul. 73-410, 1973-2 C.B. 53

IRS revenue ruling

Component depreciation for used real property is allowed when a qualified appraiser allocates the acquisition cost among individual components and assigns separate useful lives based on each component's actual condition at the time of purchase. This opened component-level depreciation to buyers of used buildings who previously had to use a single composite life under Rev. Rul. 66-111.

Rev. Proc. 72-10

Rev. Proc. 72-10, 1972-1 C.B. 721

IRS revenue procedure

Created the elective Asset Depreciation Range system with over 100 asset guideline classes and a range of acceptable depreciation lives. Businesses could choose any life within the published range for each class. Applies to property placed in service after 1970.

Rev. Rul. 68-4

Rev. Rul. 68-4, 1968-1 C.B. 77

IRS revenue ruling

Under the pre-1981 asset guideline class system, taxpayers who elected to use an asset guideline class had to depreciate all assets in that class together under a single composite life. Individual assets within a class could not be cherry-picked into separate class-life schedules.

Rev. Rul. 66-111

Rev. Rul. 66-111, 1966-1 C.B. 46

IRS revenue ruling

When a used building is acquired for a lump sum, the buyer must use one composite useful life for the whole building. Basis cannot be allocated to separate component accounts for depreciation purposes. Original builders and owners could still use component depreciation, but buyers of used buildings were limited to a single life.

Rev. Rul. 65-265 (Land Clearing & Grading)

1965-2 C.B. 52

IRS revenue ruling

Costs of general grading and clearing of land are capital expenditures that become part of the non-depreciable cost basis of the land. Costs of excavation, grading, and removing soil necessary for the proper setting of buildings and paving of roadways are part of the cost of those depreciable assets and are included in their depreciable base. Clarified by Rev. Rul. 68-193.

Rev. Rul. 65-79

Rev. Rul. 65-79, 1965-1 C.B. 26

IRS revenue ruling

Certain bank assets, including vault doors, night depositories, and walk-up and drive-up teller windows, qualify as Section 38 personal property for investment tax credit purposes. A drive-up teller booth, by contrast, is a building under Regulation 1.48-1(e). Property may be personal property for tax purposes even if local law treats it as a fixture.

Rev. Proc. 62-21

Rev. Proc. 62-21, 1962-2 C.B. 418

IRS revenue procedure

Replaced Bulletin F with standardized industry-based asset guideline classes. Each class came with a safe-harbor useful life. Businesses could use that life without proving the specific expected life of each asset.

IRC §168(k) Bonus Depreciation

26 U.S.C. §168(k)

Internal Revenue Code

Allows an extra first-year write-off (bonus depreciation) on qualifying property with a recovery period of 20 years or less. It fell from 100% to 80%, 60%, and 40%, then the OBBBA law (Pub. L. 119-21, July 2025) brought it back to a permanent 100% for qualifying property acquired after January 19, 2025. Used property can qualify if you had not used it before and the purchase passes the related-party rules.

OBBBA — Permanent 100% Bonus Depreciation (IRC 168(k))

Pub. L. No. 119-21 (July 4, 2025), amending IRC 168(k)

Internal Revenue Code

The One Big Beautiful Bill Act permanently restored 100% additional first-year (bonus) depreciation under IRC Section 168(k) for qualified property acquired and placed in service after January 19, 2025. This removed the TCJA phasedown that had reduced the rate to 60% in 2024 and 40% in 2025. An election allows a taxpayer to use 40% instead (60% for long-production-period property) for the first taxable year ending after January 19, 2025.

OBBBA — Qualified Production Property 100% Deduction (IRC 168(n))

Pub. L. No. 119-21 (July 4, 2025), adding IRC 168(n)

Internal Revenue Code

The One Big Beautiful Bill Act created a new elective 100% depreciation allowance under IRC Section 168(n) for Qualified Production Property (QPP). QPP is nonresidential real property used as an integral part of a qualified production activity such as manufacturing, production, or refining. Construction must begin after January 19, 2025 and before January 1, 2029, and the property must be placed in service before January 1, 2031. The election is irrevocable. Section 1245 recapture applies if qualified production use ceases within 10 years. Offices, parking, sales space, R&D, and finished-goods storage are excluded.

IRC §168(e)(6) Qualified Improvement Property

26 U.S.C. §168(e)(6), as amended by CARES Act §2307

Internal Revenue Code

Defines QIP and excludes expenditures attributable to building enlargement, any elevator or escalator, and the internal structural framework. After the CARES Act fix, QIP is 15-year property under section 168(e)(3)(E)(vii), carries a 20-year ADS recovery period under the section 168(g)(3)(B) table, and can qualify for bonus depreciation under section 168(k).

Treas. Reg. §1.168(k)-2

26 C.F.R. §1.168(k)-2

Treasury regulation

Property bought under a written binding contract is acquired under the contract-date rules; self-constructed property is acquired when physical work of a significant nature begins, with a safe harbor treating work as begun when more than 10 percent of total cost (excluding land and preliminary activities) is paid or incurred. These dates decide which bonus rate applies. For property acquired after January 19, 2025, the OBBBA statute overrides the regulation's phase-down schedule, and Notice 2026-11 directs taxpayers to apply these same rules with the OBBBA dates substituted until new regulations are issued.

CARES Act §2307 — QIP Technical Correction

CARES Act Section 2307, P.L. 116-136, 134 Stat. 281 (Mar. 27, 2020); amending IRC 168(e)(3)(E), (e)(6), (g)(3)(B)

Federal statute (CARES Act)

Fixed a drafting error in the 2017 Tax Cuts and Jobs Act that had accidentally left qualified improvement property off the 15-year list. The CARES Act correction adds qualified improvement property to the 15-year MACRS class and makes it eligible for 100 percent bonus depreciation. The fix applies retroactively to property placed in service after December 31, 2017.

T.D. 9874 (First Final TCJA Bonus Regs)

T.D. 9874, 84 Fed. Reg. 50108 (Sept. 24, 2019); 26 CFR 1.168(k)-2

Treasury decision

T.D. 9874 finalized the first set of TCJA bonus depreciation regulations. It set the rules for which property qualifies, including used property acquired after 2017. It also established the binding-contract rule, the placed-in-service rule for self-constructed property, and the mechanics for the elections under Section 168(k)(5), (7), and (10).

REG-106808-19 (TCJA Component Election Proposed Regs)

REG-106808-19, 84 Fed. Reg. 50130 (Sept. 24, 2019)

IRS proposed regulation

REG-106808-19 proposed additional TCJA bonus rules, including the component election for parts of a larger self-constructed property. It also addressed the de minimis rule for used property and the special rules for public utilities and partnerships. These proposals were adopted, with modifications, as T.D. 9916.

REG-104397-18 (First TCJA Bonus Proposed Regs)

REG-104397-18, 83 Fed. Reg. 39292 (Aug. 8, 2018)

IRS proposed regulation

REG-104397-18 was the first set of proposed regulations under TCJA for the Section 168(k) bonus deduction. It defined which property qualifies, established the used-property rules, and explained the binding-contract and placed-in-service timing rules. These proposals were adopted, with modifications, as T.D. 9874 in September 2019.

IRC §168(g) Alternative Depreciation System

26 U.S.C. §168(g)

Internal Revenue Code

ADS is mandatory for the categories listed in section 168(g)(1), including property of an electing real property trade or business under sections 168(g)(8) and 163(j)(7)(B). Section 168(k)(2)(D) excludes property to which ADS applies from bonus-eligible qualified property, determined without regard to the voluntary section 168(g)(7) election. So a voluntary ADS election does not kill bonus, but mandatory ADS status does.

Tax Cuts and Jobs Act of 2017, Section 13201

Pub. L. 115-97, Section 13201 (Dec. 22, 2017)

U.S. statute

Expanded bonus depreciation to 100% for qualified property acquired after September 27, 2017 and placed in service before January 1, 2023. Extended eligibility to certain used property. Set the phase-down schedule: 80% for 2023, 60% for 2024, 40% for 2025, 20% for 2026. Added elections under Sections 168(k)(7) and 168(k)(10).

Protecting Americans from Tax Hikes Act of 2015 (PATH Act), Sections 143-144

Pub. L. 114-113, Div. Q, Sections 143-144 (Dec. 18, 2015)

U.S. statute

Extended 50% bonus depreciation through 2017, then phasing to 40% for 2018 and 30% for 2019. Introduced qualified improvement property (QIP) as a new category eligible for bonus depreciation under 168(k).

Tangible Property Regulations

Treas. Reg. §1.263(a)-3

Treasury regulation

Defines a building's structure and its major systems (HVAC, plumbing, electrical, elevators, fire protection, security, and gas distribution), and gives the betterment, restoration, and adaptation test for deciding when a cost is a repair you can deduct now versus an improvement you must capitalize.

Treas. Reg. §1.168(i)-8

26 C.F.R. §1.168(i)-8

Treasury regulation

Sets the rules for how you handle a part you dispose of under MACRS (sale, retirement, abandonment, or destruction), including the partial disposition election in subsection (d).

Treas. Reg. 1.168(i)-1 — General Asset Accounts

Treas. Reg. 1.168(i)-1 (T.D. 9689)

Treasury Regulation (T.D. 9689)

Allows electing to pool multiple MACRS assets of the same class into a general asset account (GAA), depreciated as a single asset. When an asset is disposed of from a GAA, no loss is recognized; proceeds are treated as ordinary income. The qualifying-disposition election provides an escape: if made, the asset steps outside the GAA rules and gain or loss is recognized normally.

T.D. 9689 — Final MACRS Disposition Regulations

T.D. 9689, 79 FR 49571 (Aug. 18, 2014); eff. 1/1/2014

IRS Treasury Decision

Finalizes the rules for retiring a structural component of a building. When you replace a roof, HVAC unit, or other building part, you can write off whatever basis was left in the old part. The regulation also sets out accepted methods for computing that basis, such as original cost, pro-rata allocation, or a discounted-cash-flow approach.

Tax Increase Prevention Act of 2014, Section 125

Pub. L. 113-295, Section 125 (Dec. 19, 2014)

U.S. statute

Retroactively extended 50% bonus depreciation for property placed in service in 2014.

Treas. Reg. 1.263(a)-3(e) — Unit of Property and Building Systems

Treas. Reg. 1.263(a)-3(e); 1.263(a)-3(e)(2)(ii)(B) (enumerated building systems)

Treasury Regulation (T.D. 9636)

Each building and its structural components is treated as one unit of property. But the building structure and nine named building systems are each their own separate unit for purposes of the betterment, restoration, and adaptation analysis. The nine systems are: HVAC, plumbing, electrical, escalators, elevators, fire-protection and alarm, security, gas distribution, and any other system identified in published guidance.

Treas. Reg. 1.263(a)-3(j) — Betterment Test

Treas. Reg. 1.263(a)-3(j)

Treasury Regulation (T.D. 9636)

A building expenditure is a betterment, and must be capitalized, if it: (1) fixes a material condition or defect that existed when the property was acquired; (2) materially adds to the unit of property's capacity, size, or functionality; or (3) materially increases its productivity, efficiency, strength, or quality. Subsection (j)(3) applies these rules specifically to buildings.

Treas. Reg. 1.263(a)-3(k) — Restoration Test

Treas. Reg. 1.263(a)-3(k)

Treasury Regulation (T.D. 9636)

A building expenditure is a restoration, and must be capitalized, if it: (1) replaces a component on which you already claimed a Section 165 casualty loss or a retirement loss; (2) restores the property to its condition after a casualty when you already claimed a casualty loss; or (3) rebuilds the unit of property to like-new condition after its class life. Replacement of a major component or substantial structural part also triggers restoration treatment.

Treas. Reg. 1.263(a)-3(l) — Adaptation to New or Different Use

Treas. Reg. 1.263(a)-3(l)

Treasury Regulation (T.D. 9636)

An amount paid to adapt a unit of property to a new or different use must be capitalized if that use is not consistent with your ordinary use of the property when you first placed it in service. This is the third and final test in the betterment/restoration/adaptation framework.

Treas. Reg. 1.263(a)-3(h) — Small Taxpayer Safe Harbor

Treas. Reg. 1.263(a)-3(h)

Treasury Regulation (T.D. 9636)

Qualifying small taxpayers may elect to deduct building improvement costs without running the full betterment/restoration/adaptation analysis, provided total improvement amounts for the year do not exceed the lesser of $10,000 or 2% of the building's unadjusted basis. Eligibility requires average annual gross receipts of $10 million or less for the prior three years and a building with an unadjusted basis of $1 million or less.

Treas. Reg. 1.263(a)-3(i) — Routine Maintenance Safe Harbor

Treas. Reg. 1.263(a)-3(i)

Treasury Regulation (T.D. 9636)

Routine maintenance that a taxpayer expects to perform more than once during the class life of the unit of property need not be capitalized. For buildings and building systems, the recurring threshold is more than once in any ten-year period. The safe harbor does not apply to amounts that must be capitalized as betterments under separate subsections.

Treas. Reg. 1.263(a)-1(f) — De Minimis Safe Harbor

Treas. Reg. 1.263(a)-1(f)

Treasury Regulation (T.D. 9636)

Taxpayers may elect to expense acquired or produced tangible property below a per-invoice/per-item dollar threshold rather than capitalizing and depreciating it. The threshold is $5,000 per item for taxpayers with an applicable financial statement (audited financials or financials filed with a government agency) and $2,500 per item for all others (raised from $500 by Notice 2015-82, effective January 1, 2016). A written expensing policy in effect at the start of the tax year is required.

Treas. Reg. 1.162-4 — Repairs and Maintenance

Treas. Reg. 1.162-4 (T.D. 9636)

Treasury Regulation (T.D. 9636)

Amounts paid for repairs and maintenance that are not required to be capitalized as improvements under Section 263(a) are deductible in the year paid under Section 162(a). An optional election allows taxpayers to capitalize repair and maintenance costs that are consistent with their books and records.

T.D. 9636 — Final Tangible Property Regulations

T.D. 9636, 78 FR 57686 (Sept. 19, 2013); 2013-43 I.R.B. 331

Treasury Decision

Finalized the tangible property regulations under Sections 162(a) and 263(a), establishing the unit-of-property rules, the nine building-system units, the betterment/restoration/adaptation capitalization tests, the de minimis safe harbor, the routine maintenance safe harbor, the small taxpayer safe harbor, and the general repair deduction rule. Effective for tax years beginning on or after January 1, 2014; earlier adoption was permitted.

American Taxpayer Relief Act of 2012, Section 331

Pub. L. 112-240, Section 331 (Jan. 2, 2013)

U.S. statute

Retroactively extended 50% bonus depreciation through December 31, 2013. Also extended the Section 168(k)(4) election allowing certain businesses to accelerate AMT credits instead of taking the bonus deduction.

Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, Section 401

Pub. L. 111-312, Section 401 (Dec. 17, 2010); added IRC 168(k)(5)

U.S. statute

Created the first 100% bonus depreciation rate for qualified property acquired after September 8, 2010 and placed in service before January 1, 2012. Also extended 50% bonus for 2012 property and added Section 168(k)(5) for specified plants.

American Recovery and Reinvestment Act of 2009, Section 1201

Pub. L. 111-5, Section 1201 (Feb. 17, 2009)

U.S. statute

Extended 50% bonus depreciation through December 31, 2009, continuing the Economic Stimulus Act of 2008 framework.

Economic Stimulus Act of 2008, Section 103

Pub. L. 110-185, Section 103 (Feb. 13, 2008)

U.S. statute

Revived 50% bonus depreciation for qualified property acquired after December 31, 2007 and placed in service before January 1, 2009. Bonus had lapsed after 2005.

Treas. Reg. 1.168(i)-6 — Like-Kind Exchange Depreciation

Treas. Reg. 1.168(i)-6 (T.D. 9115, 2004)

Treasury Regulation

When MACRS property is acquired in a Section 1031 like-kind exchange or Section 1033 conversion, depreciation is split between two basis pools. The exchanged basis (the carryover from the relinquished property) continues on the remaining recovery period of the old property. The excess basis (the step-up above the exchanged basis) is depreciated as newly placed-in-service replacement property using its own recovery period and applicable bonus rules.

American Jobs Creation Act of 2004, Section 337

Pub. L. 108-357, Section 337 (Oct. 22, 2004)

U.S. statute

Section 337 made conforming and technical changes to IRC 168(k)(2) and 168(k)(4). It also added a special placed-in-service rule for certain aircraft. No general bonus rate was changed.

Treas. Reg. 1.446-1T(e)(2)(ii)(d)

Treas. Reg. 1.446-1T(e)(2)(ii)(d)(2)(i)

Treasury regulation

A change in depreciation method, recovery period, or convention is a change in accounting method. This rule became effective December 30, 2003.

Jobs and Growth Tax Relief Reconciliation Act of 2003 (50% Bonus)

Pub. L. 108-27, Section 201 (May 28, 2003)

U.S. Congress

Raised the Section 168(k) bonus depreciation rate from 30% to 50% for qualified property with original use beginning after May 5, 2003, placed in service before January 1, 2005. The qualifying rules from the 2002 law otherwise remained the same.

Job Creation and Worker Assistance Act of 2002 (Bonus Depreciation Origin)

Pub. L. 107-147, Section 101 (Mar. 9, 2002); added IRC 168(k)

U.S. Congress

Created IRC Section 168(k) and the first bonus depreciation: a 30% additional first-year deduction for qualified property with original use beginning after September 10, 2001, placed in service before January 1, 2005.

Treas. Reg. §1.469-1T(e)(3)(ii)(A)

26 C.F.R. §1.469-1T(e)(3)(ii)(A)

Treasury regulation

Under (e)(3)(ii)(A), an activity is not a rental activity for the year if the average period of customer use for the property is seven days or less. The per-se passive rental rule of section 469(c)(2) then does not apply, so the owner's loss is non-passive if the owner materially participates in the activity.

IRC §469 Passive Activity Loss

26 U.S.C. §469

Internal Revenue Code

Limits how much of a passive rental loss you can use against other income. It carves out an exception for real estate professionals (§469(c)(7)), and the regulations treat a short-term rental with an average stay of seven days or less as not a 'rental activity' at all (Treas. Reg. §1.469-1T(e)(3)(ii)(A)), so material participation can make its loss non-passive.

IRC Section 168 — MACRS

IRC Section 168

Internal Revenue Code

Section 168 created MACRS, the depreciation system used today. It sets the recovery periods and methods for every class of property: 5-year, 7-year, 15-year, 27.5-year residential, and 39-year nonresidential. It also prohibits component depreciation under subsections (f)(1) and (i)(6), but the HCA court case made clear that a proper engineering classification study is a separate and permitted method.

IRC §168(b) — Applicable Depreciation Method

26 U.S.C. 168(b)

Internal Revenue Code

Sets the depreciation method for each MACRS asset class. Short-lived personal property (3, 5, 7, and 10-year classes) uses the 200 percent declining balance method, switching to straight-line when straight-line gives a larger deduction. Fifteen and 20-year property uses 150 percent declining balance. Residential rental and commercial real property use straight-line only.

IRC §168(c) — Applicable Recovery Period

26 U.S.C. 168(c)

Internal Revenue Code

Sets the MACRS recovery periods for each asset class. The main periods are 3, 5, 7, 10, 15, 20, 25, 27.5, and 39 years. The specific class an asset belongs to is determined by Revenue Procedure 87-56 or, if no specific class fits, by the default rule of 7-year property.

IRC §168(i)(6) — Like-Kind Exchange Depreciation Rule

26 U.S.C. 168(i)(6)

Internal Revenue Code

When you acquire MACRS property in a Section 1031 like-kind exchange or a Section 1033 involuntary conversion, the depreciation for the replacement property is determined under Treasury Regulation Section 1.168(i)-6, not the standard new-asset rules.

IRC §263A — Uniform Capitalization (UNICAP)

26 U.S.C. 263A

Internal Revenue Code

Requires businesses that produce or acquire property to capitalize not only direct costs but also an allocable share of indirect costs into the property's basis. Section 263A(f) adds a specific rule requiring capitalization of interest on construction loans for real property with a long production period.

IRC §1060 — Allocation Rules for Asset Acquisitions

26 U.S.C. 1060

Internal Revenue Code

When you buy a group of assets that together make up a trade or business, the total purchase price must be allocated across all the assets using the residual method under Section 338(b)(5). Both buyer and seller must file Form 8594 reporting their allocations. Agreed values in the purchase agreement are generally binding on both parties.

Treas. Reg. §1.1245-3

26 C.F.R. §1.1245-3

Treasury regulation

Defines what counts as §1245 property by pointing back to the tangible-personal-property test of §1.48-1(c), and sets the limit on treating structural components as personal property.

IRC §1250

26 U.S.C. §1250

Internal Revenue Code

Defines real property (the building shell and structural components) as everything depreciable that is not §1245 property, and caps the tax rate on unrecaptured straight-line depreciation at 25% when you sell.

Treas. Reg. §1.48-1

26 C.F.R. §1.48-1

Treasury regulation

The older investment-credit rules that define tangible personal property versus a building and its structural components. Subsection (c) says machinery can be personal property even when attached to the ground; subsection (e)(2) lists the parts that normally stay structural (walls, floors, ceilings, central HVAC, wiring, plumbing), with a narrow exception for machinery that exists only to meet temperature or humidity needs of other equipment or product.

IRC §1245

26 U.S.C. §1245

Internal Revenue Code

Defines tangible personal property for depreciation, and says that when you sell it, the depreciation you took comes back as ordinary income up to the gain.

IRC Section 38

IRC Section 38

Internal Revenue Code

Defined eligible property for Investment Tax Credit purposes. Section 38 property was tangible personal property and certain other tangible property used in a trade or business, but did not include buildings or their structural components.

IRC Section 48

IRC Section 48

Internal Revenue Code

Authorized the Investment Tax Credit starting in 1962 and defined tangible personal property eligible for the credit. Section 48 contained the specific definitions and rules that courts applied when determining whether property was personal property or a structural component of a building.

Treas. Reg. 1.167(a)-7

Treas. Reg. 1.167(a)-7(a)

Treasury regulation

Permits taxpayers to depreciate individual assets separately or to combine assets into group accounts and depreciate the group as a single asset. This election belongs to the taxpayer.

IRC §179

26 U.S.C. §179

Internal Revenue Code

Lets you expense the cost of qualifying tangible personal property right away, up to a yearly dollar limit, with a phase-out once total purchases pass a threshold.

IRC §446(e) & §481(a) (Method Changes and Catch-Up)

26 U.S.C. §446(e); 26 U.S.C. §481(a)

Internal Revenue Code

Section 446(e) requires a taxpayer who changes a method of accounting to secure the consent of the Secretary, which the IRS grants automatically for depreciation classification changes through its automatic method change procedures (Rev. Proc. 2015-13 and the annual automatic changes list, via Form 3115). Section 481(a) requires the adjustments necessary to prevent amounts from being duplicated or omitted, which produces the one-time catch-up; for a cost segregation lookback it is typically a large negative (taxpayer-favorable) adjustment taken in the year of change.

IRC Section 167

IRC Section 167

Internal Revenue Code

Authorizes the depreciation deduction for property used in a trade or business or held for the production of income. The deduction covers exhaustion, wear, tear, and obsolescence. Section 167 is the foundational authority for all depreciation, including the MACRS system under Section 168.