Cost segregation studies for AI data centers

In short

A cost segregation study is an IRS approved engineering analysis that breaks a building into its separate parts and assigns each part the shortest tax depreciation life the law allows. For an AI data center this matters because 40 to 60 percent of the total building cost can move from 39 year straight-line depreciation into 5 year and 7 year and 15 year categories. R.E. Cost Seg The One Big Beautiful Bill Act (OBBBA), signed in July 2025, made 100 percent bonus depreciation permanent for property acquired and placed in service after January 19, 2025. 26 U.S.C. § 168(k) That means every dollar reclassified to a life of 20 years or less produces an immediate first year deduction. On a $10 million AI data center, a cost segregation study combined with 100 percent bonus depreciation can generate $3 million to $4 million in first-year deductions, compared to about $256,000 under standard 39-year depreciation. IRS Publication 946 The tax savings at a 35 percent effective rate are roughly $1.05 million to $1.4 million. The study itself costs $15,000 to $40,000. R.E. Cost Seg

What is a cost segregation study?

A cost segregation study is an engineering analysis that identifies each building component and classifies it into the correct depreciation category. By default, an AI data center building is nonresidential real property depreciated straight-line over 39 years under the Modified Accelerated Cost Recovery System, or MACRS. But many parts of the building are not real property at all under the tax code. They are tangible personal property with 5-year or 7-year lives, or land improvements with 15-year lives. Cost segregation finds those parts and assigns the shorter life.

The study focuses on the building infrastructure that houses and supports the IT equipment. Servers, GPUs, storage arrays, and networking hardware already depreciate over 5 or 7 years as personal property, often under section 179 or regular MACRS. Seneca Cost Segregation The cost segregation study addresses the real estate envelope, the power distribution inside the walls, the cooling plant, the raised floor, the security systems, and the site improvements.

An AI data center is an especially strong candidate for cost segregation because so much of its construction cost goes into specialized systems that serve the IT load rather than general building operations. Between 40 and 60 percent of total AI data center construction cost can typically be reclassified into shorter recovery periods. R.E. Cost Seg, Seneca Cost Segregation

Why the 2025 tax law changed the math

The OBBBA, signed on July 4, 2025 as Public Law 119-21, permanently restored 100 percent bonus depreciation for qualified property acquired and placed in service after January 19, 2025. Congress.gov Before that, the Tax Cuts and Jobs Act bonus depreciation was phasing down, 60 percent for 2024, 40 percent for 2025, 20 percent for 2026, and zero for 2027. CRS Report RL31852 A cost segregation study always helped by shortening the depreciation lives, but the phase down meant a diminishing share of the reclassified basis could be deducted immediately. Now, with permanent 100 percent bonus depreciation, every dollar moved into a recovery period of 20 years or less is fully deductible in the year the property is placed in service.

The permanent 100 percent rule

Under section 168(k) as amended by the OBBBA, a taxpayer may deduct 100 percent of the adjusted basis of qualified property in the year it is placed in service. Qualified property means tangible property with a MACRS recovery period of 20 years or less, certain computer software, water utility property, and qualified film, television, theatrical, and sound-recording productions. 26 USC § 168(k)(2)(A), IRS Notice 2026-11 Used property qualifies if the taxpayer did not previously use it and acquired it from an unrelated party. There is no expiration date. The 100 percent rate is now permanent.

The acquisition date cutoff

A property is generally acquired on the date a written binding contract is entered into. Tax alert A contract is binding if it is enforceable under state law and does not limit damages to a specified amount. For property acquired on or before January 19, 2025, the old TCJA phase-down schedule still applies. For property acquired after that date, the permanent 100 percent rate applies.

The 10 percent safe harbor for self-constructed property

Many AI data centers are built by the owner rather than purchased from a third party. For self-constructed property, Notice 2026-11 provides a 10 percent safe harbor. If more than 10 percent of the total hard costs, excluding land, planning, design, financing, and exploratory work, were incurred or paid on or before January 19, 2025, the entire project is treated as having begun construction before the OBBBA effective date. The TCJA phase-down rate then applies. If the 10 percent threshold is not crossed, the OBBBA 100 percent rate applies. EisnerAmper

The component election

Even if a project as a whole exceeds the 10 percent safe harbor, individual components that do not cross the threshold can still qualify for 100 percent bonus depreciation. Treasury Regulation section 1.168(k)-2(c) allows a taxpayer to treat different components of a larger self-constructed property as separate units for bonus depreciation purposes. EisnerAmper A component is a separable part of the property, such as a cooling system, an electrical distribution segment, or a security installation. A component that had less than 10 percent of its costs incurred on or before January 19, 2025 can independently qualify for 100 percent bonus depreciation, even if the rest of the project is stuck with the TCJA phase-down rate.

The OBBBA also provides a one time transition election. For the first tax year ending after January 19, 2025, a taxpayer may elect 40 percent bonus depreciation instead of 100 percent, or 60 percent for longer production period property and certain aircraft. IRS Notice 2026-11 This election lets taxpayers spread deductions over years instead of taking a single large deduction.

A taxpayer may also irrevocably elect out of bonus depreciation entirely for any class of property placed in service during the tax year, by attaching a statement to a timely filed return. The election is made class by class. IRS Notice 2026-11 This can help a taxpayer in a net operating loss position or one expecting higher future tax rates.

How the IRS decides what is five-year property

The core of any cost segregation study is classifying each building component as either section 1245 property, which qualifies for shorter MACRS lives and bonus depreciation, or section 1250 property, which stays at 39 years. The distinction is factually intensive. There is no bright line rule. Every classification depends on how the asset is attached, what it serves, and whether removing it would damage the building. IRS Pub. 5653

The section 1245 and section 1250 divide

Section 1245 property is any depreciable property that is personal property, or other tangible property (not including a building or its structural components) used as an integral part of manufacturing, production, extraction, or furnishing transportation, communications, electrical energy, gas, water, or sewage disposal services (or a research or bulk storage facility used in connection with those activities). Additional categories include certain amortizable real property, single purpose agricultural or horticultural structures, petroleum storage facilities, railroad grading or tunnel bores, and qualified production property. 26 U.S.C. § 1245 Section 1250 property is any depreciable real property that is not section 1245 property. IRS Pub. 5653

The classification test, drawn from the investment tax credit regulations at Treas. Reg. section 1.48-1 and endorsed by the Tax Court in Hospital Corporation of America v. Commissioner, looks at whether an asset is a building or other inherently permanent structure, or a structural component of a building. The analysis considers three things. First, how permanently the asset is attached to the building. Second, whether removal would cause structural damage. Third, whether the asset relates to the operation or maintenance of the building itself, or instead to a specific function like manufacturing or data processing. HCA v. Commissioner, 109 T.C. 21 (1997)

The functional allocation approach for electrical systems

The functional allocation approach for electrical distribution systems is spelled out in Chapter 8 of the IRS Cost Segregation Audit Techniques Guide. IRS Pub. 5653, Ch. 8.A A building’s electrical distribution system, meaning the wiring, panels, switchgear, and conduits from utility feed to end use, is not an all-or-nothing proposition. Instead, an engineering-based electrical load analysis determines what percentage of the total electrical demand goes to equipment that qualifies as section 1245 property. That same percentage of the electrical distribution system cost is then classified as section 1245 property and depreciated over 5 years. The remainder stays as section 1250 property, depreciated over 39 years.

In a typical AI data center, 30 to 50 percent of the total electrical distribution typically serves server equipment. R.E. Cost Seg That means 30 to 50 percent of the electrical distribution system cost can be reclassified to 5-year property. The IRS Audit Techniques Guide includes a worked example. In a building with a $1,000,000 electrical distribution system where 38.4 percent of the electrical load serves section 1245 equipment, $384,000 is allocated to section 1245 property. IRS Pub. 5653, Ch. 8

Redundant power systems, parallel UPS units, dual power feeds, and N+1 cooling configurations receive the same favorable classification treatment as primary systems for fault tolerance. R.E. Cost Seg

The key cases

In Hospital Corporation of America v. Commissioner, 109 T.C. 21 (1997), the Tax Court held that the portion of a hospital primary and secondary electrical distribution system corresponding to the electrical load serving medical equipment qualified as section 1245 property eligible for 5-year depreciation. The load percentages ranged from 23 percent for small psychiatric facilities to 36 percent for small medical and surgical facilities. The IRS acquiesced to the use of investment tax credit rules for distinguishing section 1245 from section 1250 property but did not agree with every specific factual determination. HCA v. Commissioner, IRS AOD 1999-008

In Scott Paper Co. v. Commissioner, 74 T.C. 137 (1980), the Tax Court first applied the functional allocation approach, splitting a paper plant electrical system between ITC-eligible and ineligible property based on the power demand, measured in kVA, of the end use machinery. The IRS later stated it would not challenge this approach. IRS Pub. 5653, Ch. 8

Where AI data center components fall

The classification of specific AI data center assets follows the logic of the functional allocation approach and the permanent attachment test. The table below summarizes where common components land.

Seneca Cost Segregation, R.E. Cost Seg, IRS Pub. 5653

Five-year property

The most valuable category for AI data centers. Branch circuits that feed power directly to server racks qualify because they serve a specific IT function rather than general building operations. A typical AI data center dedicates 30 to 50 percent of its total electrical distribution to server equipment. R.E. Cost Seg A 50,000 square foot AI data center typically contains $500,000 to $800,000 in structured cabling and telecommunications infrastructure eligible for 5-year treatment and bonus depreciation. R.E. Cost Seg Precision cooling units that serve the server floor directly, rather than general office comfort, also fall here.

Seven-year property

UPS systems and power conditioning equipment are classified as 7-year property. Seneca Cost Segregation This category also covers certain generator infrastructure and specialized lighting controls. The distinction between 5-year and 7-year property matters less under permanent 100 percent bonus depreciation because both lives are under 20 years and both qualify for immediate expensing. But the classification still matters for state tax purposes where bonus depreciation may not apply.

Fifteen-year property

Raised access flooring that serves cable management and cooling airflow, rather than merely providing a walking surface, qualifies as 15-year property. Seneca Cost Segregation Site improvements like paving, fencing, access roads, landscaping, and outdoor utility conduit also fall into this category. Qualified Improvement Property, interior improvements to nonresidential real property made after the building is placed in service, depreciates over 15 years and is eligible for bonus depreciation. It does not include building expansions, internal structural frameworks, elevators, or escalators. Thomson Reuters The CARES Act corrected QIP to 15-year GDS in 2020.

What stays at 39 years?

The structural shell, load-bearing walls, foundation, roof, main service panels, general building wiring, standard HVAC serving office areas, and standard fire sprinklers remain at 39-year straight-line. The key test is function. An electrical system serving a specific IT function qualifies for shorter lives. Wiring and electrical systems integral to the general building structure stay at 39 years, regardless of where they are physically located. Seneca Cost Segregation

How a cost segregation study is done

The six IRS recognized methodologies

The IRS Audit Techniques Guide identifies six methodologies for conducting a cost segregation study, listed in descending order of reliability. IRS Pub. 5653, Ch. 3

1. Detailed engineering approach from actual cost records. The engineer works from the project actual cost records, performing quantity take offs and assigning unit costs to each component. This is the most reliable method and the one the IRS prefers.
2. Detailed engineering cost estimate approach. Similar to the first method, but uses estimated costs when actual cost records are unavailable.
3. Survey or letter approach. The engineer surveys the property and obtains cost estimates from the contractor or from published cost data.
4. Residual estimation approach. The known cost of section 1245 components is subtracted from the total project cost, with the remainder treated as section 1250 property.
5. Sampling or modeling approach. A representative sample of the property is analyzed in detail, and the results are extrapolated to the whole.
6. Rule of thumb approach. The IRS explicitly states that rule of thumb estimates, such as applying a flat percentage to the total cost without an engineering analysis, should be viewed with caution by examiners since they lack sufficient documentation. IRS Pub. 5653, Ch. 3

The 13 elements of a quality study

The IRS Audit Techniques Guide lists 13 principal elements of a quality cost segregation study. IRS Pub. 5653, Ch. 4 A study prepared by someone with an engineering or construction background carries more weight with the IRS than one prepared without such expertise. The 13 elements are preparation by a qualified individual, a detailed description of the methodology used, appropriate documentation, interviews with project stakeholders, use of common nomenclature, a standard numbering system, legal analysis supporting the classifications, unit cost determinations and engineering take-offs, organization of assets into lists or groups, reconciliation of costs to total actual costs, proper treatment of indirect costs, identification and listing of all section 1245 property, and consideration of related issues like section 263A, change in accounting method, and sampling methodology.

The IRS does not require a physical site visit. IRS Publication 5653, Chapter 4, states that a quality cost segregation study includes a site visit and uses documentation such as photographs, construction drawings, and contractor payment records. IRS Pub. 5653, Ch. 4

When to start

A complete cost segregation study cannot be finalized until construction is finished because the final cost data must be reconciled. But the work should begin at the start of construction, ideally while the general contractor cost detail is still accessible and the project team can answer questions about specific components. BDO, Arizona DOR Early planning also allows the design team to structure component level cost tracking in a way that supports the eventual study.

What a study costs and what it returns?

A cost segregation study for an AI data center typically costs $15,000 to $40,000. R.E. Cost Seg The return on that investment typically runs from 10 to 1 up to 25 to 1, depending on the size of the property and the applicable bonus depreciation rate. Seneca Cost Segregation Through a cost segregation study, accelerated depreciation can create $200,000 to $400,000 in additional deductions for every $1 million spent on an AI data center facility. EisnerAmper

A real example makes the numbers concrete. A $25 million AI data center project scheduled for purchase in February 2025 underwent a cost segregation study. The study identified $8 million in 5-year property, 32 percent of the total, $2 million in 7-year property, 8 percent, and $3 million in 15-year property, 12 percent. Together, $13 million in basis qualified for 100 percent bonus depreciation, producing over $13 million in first-year deductions. Under standard 39-year depreciation, the first-year deduction would have been roughly $641,000. R.E. Cost Seg

Contingency fee arrangements for cost segregation studies are explicitly flagged by the IRS as creating incentives for aggressive classifications and increase audit risk. R.E. Cost Seg A fixed fee engagement with a qualified engineering firm is the safer course.

Fixing past years with Form 3115

A cost segregation study is not only for new construction. An AI data center that has been in service for years and depreciated entirely as 39-year property can still benefit. The mechanism is a change in accounting method filed on Form 3115.

For nonresidential real property, the automatic change procedure uses Designated Change Number 196, or DCN 7 for residential rental property. There is no user fee. Form 3115 cost seg guide, Cost segregation guide The section 481(a) adjustment captures all the depreciation that was missed in prior years, calculated as the difference between what was actually deducted and what would have been deducted under the correct shorter lives. That entire catch up amount is taken as a single deduction in the year the change is filed. No amended returns are necessary.

The bonus depreciation rate on the reclassified components is determined by the property’s original placed-in-service date, not the year the study is performed. A property placed in service in 2021, when 100 percent bonus depreciation was in effect under the original TCJA, still qualifies for 100 percent bonus depreciation on the reclassified components. WCG CPAs

The original Form 3115 is attached to the taxpayer’s timely filed federal return, including extensions, for the year of change. A signed duplicate must be mailed to the IRS office in Ogden, Utah, no earlier than the first day of the year of change and no later than when the original is filed with the return. FindCostSeg

There is no lookback limit. A property owned for 10 years can still benefit from a study. FindCostSeg Generally, the taxpayer must have used the current accounting method for at least two years before filing the change. WCG CPAs And the five year rule under Revenue Procedure 2015-13 restricts use of the automatic change procedure for the same item if it was changed within the prior five years. A second change on the same item within that window would require non automatic procedures with advance IRS consent and a user fee. FindCostSeg

A real case illustrates the opportunity. A 75,000 square foot AI data center in Northern Virginia underwent a cost segregation study and the analysis revealed $2.5 million in accelerated depreciation opportunities the owner’s CPA had missed entirely. R.E. Cost Seg

The recapture trap on sale

Reclassifying building components from section 1250 property into section 1245 property changes what happens when the AI data center is sold.

On the sale of section 1245 property, all depreciation previously taken, including bonus depreciation and section 179 deductions, is recaptured as ordinary income to the extent of the gain realized. Ordinary income is taxed at the taxpayer’s marginal rate, up to 37 percent for individuals in 2025. Any gain exceeding total depreciation taken is section 1231 gain, taxed at long term capital gains rates. Depreciation recapture guide

On the sale of section 1250 property depreciated on a straight-line basis, which is all post 1986 real property, there is generally no ordinary income recapture. Instead, the gain attributable to depreciation, known as unrecaptured section 1250 gain, is taxed at a maximum rate of 25 percent. EisnerAmper, Source Advisors

Cost segregation moves basis from the 25 percent recapture bucket into the 37 percent recapture bucket. That is a real cost on exit, and it must be weighed against the time value of the immediate first-year deduction. For a long-term holder, the present value of a dollar deducted today and recaptured at a higher rate a decade or more later often still favors the front loaded deduction. But the calculation should be modeled specifically for each project and each owner.

State conformity, where it works and where it does not

The federal bonus depreciation deduction does not automatically carry over to state income tax returns. Each state decides independently whether to conform to the current Internal Revenue Code.

States that fully conform to federal bonus depreciation include Texas and Colorado. Bloomberg Tax Texas recently updated to current year IRC conformity effective for 2026 franchise tax reports. Virginia does not conform to federal bonus depreciation rules. Under HB 29 enacted February 20, 2026, Virginia continues to decouple from bonus depreciation under IRC §168(k), requiring taxpayers to add back any bonus depreciation claimed on their federal return. Virginia Tax Bulletin 26-1

States that do not conform and require taxpayers to add back the federal bonus depreciation deduction include California, New York, New Jersey, Pennsylvania, and Massachusetts. Bloomberg Tax Arizona requires an add back but allows a corresponding deduction spread over time. California also does not recognize QIP as 15-year property, meaning AI data centers in California must maintain separate federal and state depreciation schedules for both bonus depreciation and QIP treatment. BDO

Florida has long decoupled from federal bonus depreciation, requiring corporations to add back the federal deduction and recover it over seven years. In the 2026 session the Legislature passed HB 7031, the companion to SB 7048, to update the state’s conformity date, decline the One Big Beautiful Bill Act’s depreciation relief, and extend that addback to property placed in service on or after January 1, 2027, when the prior provision was set to lapse. Florida Senate Bill Analysis The bill cleared the House 109 to 0 and the Senate 34 to 0 and was enrolled on March 12, 2026. HB 7031 Final Bill Analysis, HB 7031 Bill History Either way, the practical result is unchanged. Florida corporations continue to add back federal bonus depreciation.

For a national AI data center developer building in multiple states, the compliance burden is real. Each nonconforming state requires a separate depreciation schedule tracking the state basis, the state depreciation deduction, and the eventual state recapture on sale. An AI data center in Northern Virginia, where land values are high and state conformity is generally favorable, presents a different tax profile from an otherwise identical facility in Northern California, where land values are also high but the state does not conform to bonus depreciation at all.

Stacking cost segregation with other incentives

Cost segregation does not operate in isolation. Several other federal tax provisions can be combined with it to increase the total benefit.

Section 179D energy efficient commercial building deduction. A deduction of up to $5.81 per square foot is available for energy-efficient building systems when prevailing wage and apprenticeship requirements are met. IRS This deduction stacks with cost segregation and bonus depreciation. The OBBBA accelerated the termination date for section 179D to June 30, 2026, for property that has not begun construction on or before that date. CLA

Section 179 expensing. The OBBBA increased the section 179 expensing limit to $2.5 million for 2025, with the phase out beginning at $4 million. This can be used for servers, networking equipment, and other tangible personal property, but not for real property components.

Interest deductibility under section 163(j). The OBBBA permanently restored the add back of depreciation, amortization, and depletion to the adjusted taxable income calculation for section 163(j) purposes, for tax years beginning after 2024. BDO This expands interest deductibility for debt financed AI data centers, which complements the cash flow benefit of cost segregation and bonus depreciation.

Research and experimental costs under section 174. The OBBBA restored immediate expensing for domestic research and experimental costs for tax years beginning after December 31, 2024. This can benefit AI data center operators developing new tools, systems, and processes. BDO

Land value allocation. In high value markets like Northern Virginia or Northern California, proper land valuation is critical. Land is not depreciable. Every dollar allocated to land rather than to the building reduces the depreciable basis available for cost segregation. An independent appraisal that supports a lower land to building ratio preserves more basis for reclassification. R.E. Cost Seg

Key takeaways

1. A cost segregation study is an IRS-approved engineering analysis that reclassifies AI data center building components from 39-year straight-line depreciation into 5-year, 7-year, and 15-year categories. Between 40 and 60 percent of total building cost can typically be reclassified for an AI data center, and the most specialized facilities reach the higher end.

2. The OBBBA made 100 percent bonus depreciation permanent for qualified property acquired after January 19, 2025. Every dollar reclassified into a recovery period of 20 years or less is now fully deductible in year one, with no expiration.

3. On a $10 million AI data center, the combination of cost segregation and 100 percent bonus depreciation can produce $3 million to $4 million in first-year deductions, generating $1.05 million to $1.4 million in tax savings at a 35 percent effective rate, compared to about $256,000 under standard 39-year depreciation.

4. The functional allocation approach in Chapter 8 of the IRS Audit Techniques Guide allows an electrical distribution system to be split between section 1245 and section 1250 property based on the percentage of electrical load serving IT equipment. In a typical AI data center, 30 to 50 percent of the electrical load serves IT equipment and the corresponding share of the electrical distribution system qualifies for 5-year treatment.

5. A study should begin at the start of construction to capture cost detail while the project team is still in place. A complete study cannot be finalized until construction is finished and final costs are reconciled.

6. Properties already in service can benefit through a Form 3115 change in accounting method, with all missed depreciation captured as a single section 481(a) adjustment in the current year. There is no lookback limit, and the bonus depreciation rate is determined by the original placed-in-service date.

7. Reclassifying assets from section 1250 to section 1245 property increases the recapture rate on sale from a maximum 25 percent to ordinary income rates up to 37 percent. The time value of the front-loaded deduction usually outweighs this cost, but the tradeoff should be modeled.

8. Several major states, including California, New York, New Jersey, and Illinois, do not conform to federal bonus depreciation and require separate state depreciation schedules. AI data center developers building across multiple states face a real compliance burden.

9. A cost segregation study costing $15,000 to $40,000 typically produces a return on investment of 10 to 1 or much higher. Avoid contingency fee arrangements. The IRS views them as an audit risk factor.

10. Cost segregation stacks with the section 179D energy-efficient building deduction, section 179 expensing, expanded interest deductibility under section 163(j), and section 174 research expensing.

Frequently asked questions

Q:What is a cost segregation study?

A:A cost segregation study allocates the total cost of a building into appropriate property classes and recovery periods to properly compute depreciation deductions. IRS Publication 5653 describes six common approaches for performing these studies, with the detailed engineering approach from actual cost records being the most methodical and accurate. IRS Pub. 5653

Q:How much can I save with a cost segregation study on an AI data center?

A:Through a cost segregation study, accelerated depreciation can create $200,000 to $400,000 in additional deductions for every $1 million spent on a data center facility. EisnerAmper On a $10 million project, the first-year deduction can reach $3 million to $4 million, producing $1.05 million to $1.4 million in tax savings at a 35 percent effective rate. Seneca Cost Segregation

Q:What AI data center components qualify for 5-year depreciation?

A:Server racks and cabinets, dedicated PDUs, branch circuits serving IT equipment, precision CRAC and CRAH cooling units, in-row coolers, removable cable trays, hot and cold aisle containment structures, biometric access systems, clean-agent fire suppression, fiber optic cabling, and network switches all qualify for 5-year treatment. Seneca Cost Segregation, R.E. Cost Seg

Q:What is the difference between section 1245 and section 1250 property?

A:Section 1245 property is personal property and other tangible property used as an integral part of manufacturing, production, or extraction. Section 1250 property is depreciable real property that is not section 1245 property. Section 1245 property depreciates over shorter lives and is eligible for bonus depreciation but is subject to ordinary-income recapture on sale. Nonresidential real property, a type of Section 1250 property, is depreciated over 39 years straight-line, and unrecaptured Section 1250 gain is taxed at a maximum rate of 25 percent. 26 U.S.C. § 1245, 26 U.S.C. § 1(h), IRS Pub. 5653

Q:Does the OBBBA 100 percent bonus depreciation apply to my existing AI data center?

A:It applies to property acquired after January 19, 2025. For an existing AI data center placed in service before that date, the applicable bonus depreciation rate is determined by the original placed-in-service date under the TCJA phase-down schedule. A cost segregation study performed now on an older property can still reclassify components and capture missed depreciation through Form 3115, using the bonus rate that applied in the year of original placement. WCG CPAs

Q:What happens to depreciation recapture when I sell an AI data center?

A:On the section 1245 portion, all depreciation taken, including bonus depreciation, is recaptured as ordinary income up to 37 percent to the extent of gain. On the section 1250 portion, the recapture rate is capped at 25 percent. Cost segregation studies often reclassify a portion of real estate as Section 1245 property, so depreciation recapture is a concern for property owners considering a study. EisnerAmper

Q:Which states conform to federal bonus depreciation for AI data centers?

A:Texas and Colorado fully conform. Florida, Georgia, and Virginia do not conform and require add-back calculations. California, New York, New Jersey, and Pennsylvania do not conform and require add-back calculations, and Illinois partially conforms but requires an add-back, and Massachusetts does not conform and requires add-back calculations. Arizona requires an add-back with a corresponding deduction over time. Bloomberg Tax

Q:How much does a cost segregation study cost and how long does it take?

A:A study for an AI data center costs $15,000 to $40,000. The timeline runs from two to four weeks, depending on the complexity of the facility and the availability of cost data. The study cannot be finalized until construction is complete, but preliminary work should begin at the start of construction. R.E. Cost Seg, BDO, Seneca Cost Segregation

Q:Can I do a cost segregation study on an AI data center I already own?

A:Yes. File Form 3115 under the automatic change procedures using DCN 196 for nonresidential real property. There is no user fee and no lookback limit. A property owned for 10 years can still benefit. The missed depreciation from all prior years is captured as a single section 481(a) deduction in the year of change. FindCostSeg, WCG CPAs, Veritax Advisors

Q:What is the functional allocation approach for electrical systems?

A:It is the IRS-approved method in Chapter 8 of the Audit Techniques Guide for splitting an electrical distribution system between section 1245 and section 1250 property. An engineering-based electrical load analysis determines the percentage of total power demand that goes to equipment qualifying as section 1245 property. That same percentage of the electrical distribution system cost is then classified as section 1245 property and depreciated over 5 years. The remainder stays at 39 years. IRS Pub. 5653, Ch. 8

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Junde Liu, JD, LL.M. (Taxation) candidate at UF Law. Originally published on Compute Law Blog. This article is general information and does not constitute legal advice. Reading it does not create an attorney client relationship. The reader should not act on the basis of any content here without first consulting a licensed attorney in the relevant state. Last reviewed for accuracy May 23, 2026.