Buying a Business? Do Not Let Depreciation Be an Afterthought
When a client is buying a business, the conversation usually centers on the big-ticket deal terms: purchase price, working capital adjustments, debt structure, seller financing, rollover equity, and whether the transaction should be treated as an asset sale or stock sale. Those items matter, of course. But one area is too often pushed to the back of the line: depreciation planning. That can be a costly mistake.
Cost Segregation Before Closing—Not After
A recent Accounting Today article by Anthony Venette, Manager of Valuation Services, and Nicholas Dooley, Supervisor in the Cost Segregation Services Group, made a timely and important point: buyers acquiring businesses with real estate, leasehold improvements, production facilities, or significant buildouts should be thinking about cost segregation before closing, not after.
I think they are exactly right.
Cost segregation is commonly viewed as a post-closing tax compliance exercise. The buyer completes the acquisition, the accounting team sets up the fixed assets, the tax preparer reviews the depreciation schedule, and then someone asks whether a cost segregation study might be worthwhile. That sequence may be familiar, but it is not always ideal. In many transactions, by the time the tax advisor is asked that question, the most important decisions have already been made. The better approach is to include depreciation planning as part of acquisition diligence.
Why Cost Segregation Matters in a Business Acquisition
At a high level, cost segregation is an engineering-based tax analysis that identifies building components and site improvements that may qualify for shorter depreciation recovery periods than the standard 27.5-year or 39-year life applied to residential rental or nonresidential real property.
Instead of treating an entire building as one long-lived asset, a cost segregation study may identify portions of the property that qualify as 5-year, 7-year, or 15-year property. Depending on the facts, this may include items such as specialty electrical systems, dedicated plumbing, certain flooring, decorative finishes, equipment-related improvements, parking areas, sidewalks, fencing, landscaping, exterior lighting, and other land improvements.
That distinction matters because shorter-life property generally produces faster deductions. Under current law, eligible property acquired and placed in service after January 19, 2025 may qualify for 100% bonus depreciation. That means certain assets identified in a cost segregation study may not merely be depreciated faster over time. They may be deducted immediately.
For a buyer, that can materially affect after-tax cash flow, debt service coverage, and the economics of the deal. In some cases, the tax benefit can change how the buyer thinks about the effective purchase price.
For example, assume a buyer acquires a business that includes a commercial facility, and $2,000,000 of the purchase price is allocated to depreciable building and site improvements. Without a cost segregation study, most of that amount may be depreciated over 39 years. But if a study identifies 20% of the cost, or $400,000, as shorter-life property such as land improvements, specialty electrical, dedicated plumbing, equipment-related buildout, or other qualifying components, that portion may be eligible for accelerated depreciation.
If the $400,000 qualifies for 100% bonus depreciation, the buyer may be able to deduct that amount immediately rather than recovering it slowly over decades. At an assumed combined federal and state tax rate of 35%, that timing difference could create approximately $140,000 of near-term tax cash-flow benefit.
The economics are even more meaningful when the buyer is using debt to finance the acquisition. That tax cash flow may help fund integration costs, debt service, equipment upgrades, or working capital needs after closing. This is why depreciation planning should not be treated as a tax return cleanup item. In the right transaction, it can be part of the acquisition model itself.
The Purchase Agreement Can Help or Hurt
One of the most important points raised by Venette and Dooley is that cost segregation is not just about the engineering study. It is also about the purchase agreement.
That is the part many buyers miss. When a business acquisition is structured as an asset acquisition, the parties often agree to a purchase price allocation. If the transaction involves a sale of a trade or business where goodwill or going concern value attaches, both buyer and seller generally report the allocation on Form 8594, Asset Acquisition Statement Under Section 1060.
This allocation matters because it frames how the purchase price is divided among asset classes. Cash, receivables, inventory, equipment, real estate, goodwill, and other intangible assets may each have different tax consequences. The seller may care deeply about character of gain and depreciation recapture. The buyer may care deeply about basis recovery and future deductions. This is not just a tax form. It is part of the deal economics.
The cautionary case in this area is Peco Foods v. Commissioner. In that case, the taxpayer acquired poultry processing facilities and agreed to purchase price allocation schedules as part of the transaction documents. After closing, the taxpayer obtained cost segregation studies and attempted to break portions of the real property allocation into shorter-lived assets.
The Tax Court did not allow the taxpayer to use the cost segregation study to override the allocation already agreed to in the purchase documents. The lesson is not that cost segregation does not work.
The lesson is that a cost segregation study generally cannot rewrite a binding purchase price allocation after the fact. That is why the purchase agreement should be reviewed before signing.
If the buyer wants flexibility to perform a component-level depreciation analysis after closing, the agreement should not unnecessarily lock all real estate-related value into broad categories that later limit the buyer’s ability to classify assets properly.
The Real Planning Opportunity: Pre-Close Review
For buyers, the practical takeaway is simple: depreciation planning should be part of due diligence. Before closing, the buyer and tax advisor should ask several questions:
- Is the transaction an asset acquisition subject to Section 1060 reporting?
- Will both parties be filing Form 8594?
- Does the draft purchase price allocation identify real estate, improvements, equipment, goodwill, and other assets in a way that makes sense?
- Does the agreement use overly broad categories such as “building” or “real property improvements” without preserving the buyer’s ability to perform a more detailed depreciation analysis?
- Does the property include parking lots, fencing, landscaping, exterior lighting, production infrastructure, dedicated mechanical systems, or equipment-related buildout?Will the buyer have enough taxable income to use accelerated depreciation deductions?
- Are there state tax limitations or nonconformity issues?
- Could the buyer benefit from a cost segregation study, partial asset disposition review, fixed asset cleanup, or Section 179 and bonus depreciation analysis?
These questions should not wait until the tax return is being prepared. By then, the buyer may already be boxed in by the transaction documents. A tax advisor does not need to turn every acquisition into a full engineering project before closing. But the advisor should be close enough to the transaction to identify whether depreciation flexibility should be preserved.
Do Not Forget the Seller’s Perspective
It is also important to remember that buyers and sellers do not always want the same allocation. A buyer often prefers more purchase price allocated to assets that can be depreciated or amortized quickly. A seller may prefer more purchase price allocated to assets that produce capital gain treatment and less ordinary income recapture.
The allocation is therefore not merely a compliance exercise. It is a negotiated economic term. This is one reason tax advisors should be involved before the purchase agreement is finalized. If the allocation is left to the end, the tax consequences may surprise one or both parties.
Qualified Production Property Adds Another Layer
For production-oriented businesses, there may be another important consideration: qualified production property, or QPP. Section 168(n) provides a temporary 100% special depreciation allowance for certain qualified production property.
In broad terms, this provision may apply to qualifying nonresidential real property used as an integral part of a qualified production activity. This can be especially relevant for manufacturing, refining, agricultural production, and similar production-based businesses.
However, QPP should be approached carefully. It is not a blanket write-off for every building used by a business. Timing rules matter. Use of the property matters. Elections matter. Documentation matters. One of the most important limitations is that only the portion of the property used as an integral part of the qualified production activity may qualify.
Office space, administrative areas, sales areas, research functions, software development, engineering, lodging, and parking generally need to be analyzed separately. In a mixed-use facility, physical mapping may be required to support which portions qualify and which do not. In other words, calling a facility a “production building” is not enough. The tax treatment depends on what actually happens inside the building.
Fixed Asset Setup Matters Too
Even when the purchase agreement preserves flexibility, the work is not done. The buyer’s post-closing fixed asset setup should be consistent with the purchase agreement, Form 8594, depreciation schedules, and any cost segregation report.
This is where good tax planning can get lost in translation.
If the purchase agreement says one thing, Form 8594 says another, the fixed asset ledger says something else, and the depreciation schedule tells a fourth story, the taxpayer has created unnecessary audit risk. The goal is not only to claim the benefit. The goal is to claim it in a way that can be defended. That means the buyer should coordinate the tax advisor, attorney, bookkeeper, accounting team, and cost segregation specialist. Each person may be looking at the same transaction through a different lens. The tax advisor’s job is to make sure those lenses line up.
A Better Acquisition Checklist
For clients buying businesses with real estate or significant improvements, I would recommend adding a depreciation review to the acquisition checklist. The review does not need to be complicated, but it should be intentional.
At a minimum, the buyer should identify the real estate involved, review the proposed purchase price allocation, evaluate whether cost segregation could be beneficial, consider whether QPP may apply, and confirm that the transaction documents do not unnecessarily limit post-closing depreciation analysis.
The buyer should also model the expected benefit. Accelerated depreciation is valuable only if it fits the taxpayer’s broader situation. The buyer’s taxable income, passive activity limitations, debt structure, state tax profile, future sale plans, and long-term cash-flow needs all matter.
Bonus depreciation is powerful, but it is not magic. It accelerates deductions. It does not eliminate the need for technical analysis, documentation, and professional judgment.
Final Thought
The main point is this: cost segregation should no longer be viewed as something to consider after the acquisition dust settles. In the right transaction, it belongs in the diligence process.
Anthony Venette and Nicholas Dooley deserve credit for highlighting a planning issue that is easy to overlook but increasingly important under current law. For buyers, the opportunity is not just finding shorter-life assets after closing. The opportunity is preserving the ability to do so before the deal documents are signed.
For tax advisors, this is where we can add real value. We can help clients see that depreciation is not just a compliance calculation. It is part of the transaction strategy. When a client is buying a business, the question should not be, “Should we look at cost segregation after closing?”
The better question is, “Before we sign, have we protected the buyer’s depreciation position?”