IRS guidance · 2025
IRS Pub. 5653, Ch. 8A: Electrical Distribution System Allocation
IRS Pub. 5653 (2-2025), Ch. 8A — Electrical Distribution System
IRS audit technique guide
Audio summary
A short audio walkthrough of this rule: what it says and why it matters for your study.
What it holds
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.
Why it matters for your study: Electrical systems are one of the most frequently audited items in a cost segregation study because the numbers are large and the split requires engineering judgment. Chapter 8A gives that split a no-challenge safe harbor when the functional allocation approach is applied and documented correctly.
Where this comes from
Electrical work often represents a large share of a building's total construction cost. Some of that electrical work serves the building's general function, making it a Section 1250 structural component that deprecates over 39 years (or 27.5 years for residential rental). Some of it serves specific equipment or industrial processes, making it Section 1245 personal property that depreciates in 5 or 7 years.
Chapter 8A of Publication 5653 is the IRS's own guidance on how to make that split. It was developed because electrical distribution allocations were a frequent source of disputes.
What it says
Chapter 8A describes the functional allocation approach. The approach assigns each electrical circuit to the Section 1245 or Section 1250 class based on what that circuit primarily serves. Circuits that serve specific equipment, such as machinery, process lines, or specialized lighting for a particular function, are personal property. Circuits that serve the building in general, such as standard interior lighting, exit signs, or common-area outlets, are structural components.
The chapter states directly: when a taxpayer properly uses this approach, the allocation should not be challenged and no adjustments to the allocation are necessary. That is the no-challenge standard written into the IRS's own guide.
How it shows up in a study
Our engineers apply the functional allocation approach to every building's electrical system. We trace each major circuit or panel to the loads it serves. That analysis is documented in the engineering procedures section of the report, and the citation to Chapter 8A appears in the legal analysis section.
When the report shows that the allocation follows Chapter 8A, an examiner reviewing the electrical line items faces a high bar. Challenging the allocation means bringing a competing engineering analysis that shows the functional approach was applied incorrectly. A well-documented study makes that very difficult.
What it does not mean
The no-challenge standard applies only when the functional allocation approach is properly applied and documented. An electrical split that uses rough percentages or assigns amounts without tracing the circuits to their loads does not qualify for the Chapter 8A protection.
The approach also requires engineering judgment and documentation. A study that lists an electrical allocation in its schedule without showing the circuit-by-circuit analysis can be challenged even if it claims to follow Chapter 8A. The protection comes from doing the work, not from citing the chapter.
Primary source
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- Category
- Methodology & procedure
- Applies to
- All property types
- Status
- Vetted
This page explains a tax authority in plain words. It is not tax advice for your situation. The way this authority applies to your property is reviewed by a licensed tax professional. Citation is provided so you or your advisor can read the primary source.