For years, taxpayers have been able to take advantage of cost segregation studies. Fueled by recent tax law updates, these studies have become an increasingly valuable tax-planning strategy for residential and commercial property owners seeking to improve cash flow and reduce tax liabilities. However, as cost segregation studies gain interest, so does Internal Revenue Service (IRS) scrutiny. Choosing a qualified cost segregation provider is just as important as the decision to pursue the study itself.
Engaging an inexperienced or unqualified provider can expose organizations to audit risk, resulting in expensive fines, disallowed deductions and costly remediation. A reliable provider, by contrast, delivers defensible analysis, thorough documentation and an approach grounded in both engineering and tax expertise.
This article explores the essential criteria organizations should evaluate when selecting a provider, highlights key questions to ask during the decision process, and discusses why Cherry Bekaert stands out as a reliable choice in the industry.
Cost Segregation Analyses, Defined
A cost segregation study is a strategic tax planning tool that allows property owners to increase their cash flows through acceleration of depreciation deductions and deferral of tax payments. The process involves identifying and segregating a portion of a building's cost basis into shorter-lived assets. Short-lived assets in the five, seven and 15-year property categories are generally eligible for bonus depreciation.
The ideal timeframe for conducting a cost segregation analysis is within the same year a building is constructed or an existing facility is purchased. Assets placed in service in prior years can also be strong candidates for cost segregation studies, as past accelerated depreciation can be pulled into the current filing year via a Form 3115 accounting method change, with no amended return required.
[H3] How 2025 Tax Reform Updates Affect Cost Segregation Studies
Bonus depreciation rules have significantly evolved over the past decade.
With the Tax Cuts and Jobs Act (TCJA) of 2017, bonus depreciation was increased from 50% to 100%, meaning short-lived assets identified in a cost segregation study could be completely expensed in the first year. The TCJA also extended bonus to acquired assets, whereas previously only newly constructed assets qualified.
The Inflation Reduction Act of 2022 (IRA) then reduced the bonus to 80% for 2023, 60% in 2024, 40% in 2025 and 20% in 2026, with no bonus expected from 2027 onward under that law.
However, P.L. 119-21, or the “One Big Beautiful Bill Act” (OBBBA), permanently restored 100% bonus depreciation for qualified property placed in service after January 19, 2025. The IRA phase-down schedule no longer applies. Businesses can now make immediate deductions on short-lived assets identified through cost segregation studies on an ongoing basis, with no expiration.
P.L. 119-21 also created a new 100% first-year expensing allowance for qualified production property (QPP) under Section 168(n). On February 20, 2026, the IRS issued Notice 2026-16, providing interim guidance on QPP eligibility and documentation requirements. Under that guidance, a cost segregation study is the primary tool for mapping a facility into production versus non-production zones and substantiating QPP claims. Proposed regulations are forthcoming. Any provider undertaking QPP work must be familiar with Notice 2026-16 and able to document facility use at the level the IRS will require.
What Makes a Cost Segregation Provider Stand Out: 6 Considerations
While cost segregation analyses may appear standardized at a glance, the quality, accuracy and defensibility of the work can vary significantly by provider. Because studies require upfront costs, organizations may be tempted to select the lowest-cost option or pursue a software-driven solution.
However, heavily templated or automated studies can overlook property-specific details, misclassify assets or miss eligible deductions. These are critical issues that increase audit exposure and undermine the intended tax benefit.
Organizations should evaluate providers based on the following six considerations.
1. Approach
A detailed engineering-based approach drawing from actual cost records is widely considered the most accurate and defensible methodology. For newly constructed properties, this relies on actual cost records. For acquisitions, renovations or mixed-asset classes, a detailed engineering cost estimate approach may be used when complete cost data is unavailable. In both cases, professionals with engineering expertise conduct a thorough review of construction documentation, including drawings, blueprints, contracts, change orders, payment applications and vendor invoices.
When actual costs cannot be fully substantiated, the estimate approach uses industry-accepted data and professional judgment to approximate costs in a methodical, well-documented manner. This approach is most effective when supported by a multidisciplinary team that includes engineers, CPAs, tax advisors and attorneys, establishing both technical accuracy and tax compliance.
Alternative methods that rely on surveys, letters or forms depend too heavily on contractors recalling and estimating asset costs after the fact. These methods introduce greater potential for errors and incomplete documentation, increasing the risk of inaccurate results and IRS scrutiny.
2. Physical Site Inspection
While an on-site inspection is not required for every cost segregation study, it is a recommended practice in the IRS Cost Segregation Audit Techniques Guide, and its absence may be viewed as a potential red flag during IRS review.
Site inspections are especially important for newly constructed or recently acquired properties, complex facilities, renovation projects and properties with a value exceeding $5 million. An on-site review allows engineers to validate asset classifications, identify property-specific features and capture details that cannot be confirmed through documentation alone.
During a thorough inspection, engineers take detailed notes and photographs, documenting assets such as HVAC systems, electrical systems, decorative lighting, flooring, plumbing and land improvements, including parking lots and sidewalks. A virtual or remote inspection may serve as an alternative in some circumstances, but it should not replace an in-person review as standard practice.
3. Documentation for Proposal
A great deal can be learned about a provider during the proposal stage. Some service providers will produce proposals using only the property's address and project cost. A more rigorous provider will review the client's closing documents and appraisal drawings to better understand the subject property and identify where meaningful opportunities exist, including in cost segregation, QPP and other related incentives.
4. Other Tax-related Services
Cost segregation studies are most effective when integrated into a broader tax strategy. Some providers offer additional services, such as preparation of Form 3115 accounting method changes and depreciation schedules, that help ensure the study's results are implemented accurately and efficiently.
A well-executed cost segregation study can also be combined with other incentive-based tax strategies, including:
- QPP analysis under Section 168(n) and Notice 2026-16
- Section 179D deductions for energy-efficient commercial buildings (for new construction beginning on or before June 30, 2026, note the urgent deadline above)
- Research and development (R&D) credits
Providers who can integrate these strategies into a unified engagement deliver substantially more value than those offering cost segregation alone. Ask any prospective provider whether they are equipped to perform QPP facility zone mapping under Notice 2026-16 and whether they can coordinate with energy tax specialists on Section 179D claims.
5. Statistical Sample Study
For portfolios with multiple similar properties, such as uniform apartment units or self-storage facilities, look for a provider that offers a statistical sampling approach. When applied correctly, this can reduce fees and accelerate the overall study timeline. Rather than performing a full engineering-based study on every unit, the provider analyzes a representative sample and applies the results across the broader portfolio. This approach requires a separate statistical sampling analysis in addition to the cost segregation work.
6. Construction Cost Documents
The accuracy of a cost segregation study depends heavily on how well construction costs are documented, analyzed and reconciled. Certain providers will place this task on the client. Premier providers include this step in their methodology to reconcile construction cost documents back to the budget and establish a final cost segregation balance, ensuring there are no gaps between costs and the budget. This level of diligence is critical to producing a defensible study.
Questions To Ask Potential Cost Segregation Providers
|
Question |
Why It Matters |
What To Listen For |
|
How many cost segregation studies have you completed? |
Distinguishes firms that specialize in cost segregation from those that do not. |
Ideally, thousands of studies performed, with relevant experience in your property type or industry. |
|
What is your cost segregation analysis methodology? |
Reveals the provider's technical rigor and defensibility. |
An engineering-based approach that includes site inspections, construction document review and IRS-compliant, audit-ready reporting. |
|
Can you perform QPP zone mapping under IRS Notice 2026-16? |
Determines whether the provider is equipped for post-OBBBA work requiring production versus non-production facility documentation. |
Familiarity with Notice 2026-16 requirements, ability to map facility zones and coordinate with tax counsel on QPP elections. |
|
How does your fee structure work for a cost segregation study? |
Offers insight into the provider's transparency and objectivity. |
Transparent, fixed or clearly defined fees, with no compensation tied to study results or percentage-based arrangements. |
|
What land allocation do you use? |
Supports whether the provider's methodology is non-assumptive. |
A supportable, data-driven land allocation based on appraisals or market analysis, tailored to your property type. |
|
Can you provide a sample report? |
Demonstrates the provider's documentation quality. |
Detailed 100-plus-page reports with asset-level narratives, reconciled costs and photo documentation aligned with IRS guidance. |
|
What is your estimated timeline for completing a cost segregation study? |
Helps you plan and manage your tax strategy. |
A realistic timeline tied to site inspections and documentation, typically 30 days after site inspection, with a clear discussion of any trade-offs if virtual methods are used. |
Risks of AI-driven Cost Segregation Studies
The rise of low-cost, AI-driven cost segregation studies has been one of the most notable trends in recent years. While automation has its place, over-reliance on AI introduces serious limitations.
Common issues with low-cost studies include:
- Lack of engineering site inspections
- Overgeneralized assumptions based on templates
- Insufficient documentation and asset narratives
- Minimal audit defense support
- Weak coordination with depreciation, repair capitalization and credit strategies
- No capacity for QPP zone mapping required under Notice 2026-16
The IRS increasingly uses data analytics to identify outliers, and studies that rely on generic allocations are easier to challenge. When a study fails, the cost is not just lost deductions. It can also include recapture, penalties, interest and reputational risk. Quality, documentation and defensibility matter far more than speed or price.
Why Engage Cherry Bekaert as Your Cost Segregation Study Provider
Choosing the right provider is ultimately about whether you can be confident they will deliver a study that is technically sound, properly documented and defensible before the IRS.
Cherry Bekaert upholds those standards and more. We bring a disciplined, audit-ready, engineering-based approach supported by experienced tax professionals who understand how cost segregation fits within your broader tax strategy and business goals. Our team is also equipped to perform QPP zone mapping under Notice 2026-16 and to coordinate with our TCIA advisors on Section 179D claims, R&D credits and other incentives.
Guiding You Forward
To learn more about Cherry Bekaert's approach to cost segregation studies, visit our Cost Segregation Services page or connect with our Tax Credits & Incentives Advisory (TCIA) professionals to discuss your specific needs.
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