Reference
Glossary
The commercial cost-segregation terms used across this guide, in plain language.
| Term | Definition |
|---|---|
| Cost segregation | An engineering-based analysis that identifies building components which qualify for shorter depreciation lives (5-, 7- or 15-year) instead of the default 39-year commercial recovery, accelerating the deductions. |
| MACRS | The Modified Accelerated Cost Recovery System — the federal depreciation system that assigns each asset a recovery period. Rev. Proc. 87-56 lists the asset classes that map property to those periods. |
| §1245 property | Tangible personal property (equipment, trade fixtures, and MEP serving identifiable equipment). Generally 5- or 7-year. On sale, depreciation is recaptured as ordinary income. |
| §1250 property | Real property — the building shell and structural components — generally 39-year for commercial. Land improvements are a 15-year subset. Unrecaptured §1250 gain is capped at 25%. |
| Land improvements | Site work outside the building — paving, site lighting, fencing, landscaping, underground site utilities — depreciated over 15 years (Asset Class 00.3). Raw land and excavation/grading are non-depreciable. |
| Recovery period | The number of years over which an asset is depreciated (5, 7, 15, 27.5 or 39). Cost segregation moves qualifying dollars into the shorter periods. |
| The percentage of depreciable basis that a study moves out of the 39-year shell into the 5-, 7- and 15-year pools. It varies widely by property type. | |
| Depreciable basis | The portion of a property's cost that can be depreciated — the purchase price or construction cost less the value allocated to land. |
| Bonus depreciation | A provision allowing an immediate first-year deduction of a percentage of qualifying short-life property (5-, 7- and 15-year), which cost segregation identifies. The applicable percentage depends on the placed-in-service year and current law. |
| Form 3115 / §481(a) | The Change in Accounting Method form used for a look-back study on a property placed in service in a prior year. A §481(a) adjustment lets the taxpayer claim the missed depreciation as a catch-up deduction, without amending prior returns. |
| Look-back (catch-up) study | A cost-segregation study performed on a property placed in service in an earlier year, filed via Form 3115 to recover depreciation that was not accelerated at the time. |
| Identifiable-equipment principle (HCA) | The argument (from Hospital Corp. of America v. Commissioner) that MEP serving specific, identifiable equipment is depreciated with that equipment, not the building — central to medical, dental, restaurant and lab studies. |
| RMFO (retail motor-fuels outlet) | Under Rev. Proc. 97-10, a qualifying gas-station structure (≤1,400 sq ft, or ≥50% of floor space devoted to petroleum marketing) may be depreciated over 15 years rather than 39. Fact-specific; confirmed with a CPA. |
| IRS Cost Segregation Audit Techniques Guide (Pub 5653) | The IRS guidance describing how examiners evaluate cost-segregation studies and what a defensible, detailed engineering-based study contains. |
| Audit-defensible | A study whose classifications are supported by measurement or documentation and by the relevant authority, and which honestly flags the judgment calls — built to withstand IRS review. (We avoid the phrase 'IRS-defensible.') |
See also how we compare providers, the component & asset-class reference, and look-back studies & Form 3115.