Cost segregation continues to be a valuable real estate tax strategy — one that can accelerate depreciation and maximize deductions — but some investors may not take full advantage of depreciation benefits due to confusion about Internal Revenue Service (IRS) scrutiny or uncertainty about how the rules work.
In February 2025, the IRS published an updated Cost Segregation Audit Techniques Guide (ATG), introducing expanded guidance and adjusted compliance expectations. Understanding what the ATG covers, and what it does not, is essential for investors and advisors navigating today's cost segregation landscape.
Important Note: The ATG Predates the 2025 Tax Reform
The 2025 ATG was published on February 6, 2025, approximately five months before P.L. 119-21, or the “One Big Beautiful Bill Act,” that was signed on July 4, 2025. As a result, the ATG does not address permanent 100% bonus depreciation under P.L. 119-21, the new qualified production property (QPP) expensing allowance under Section 168(n), or the IRS interim guidance in Notice 2026-16 (issued February 2026).
For these matters, the controlling authorities are P.L. 119-21 and Notice 2026-16. Practitioners must supplement the ATG with these materials and anticipate a future ATG revision that incorporates P.L. 119-21 provisions. Cherry Bekaert's Tax Credit & Incentive Advisory (TCIA) professionals remain current on all applicable guidance.
What Is the IRS Cost Segregation Audit Techniques Guide?
The IRS Cost Segregation ATG is a roadmap covering 13 elements of a quality cost segregation study. The ATG explains how tax reviewers verify cost segregation studies to ensure property owners are not claiming excessive tax deductions. The guide outlines what counts as a valid classification of building components, what documentation is required and which methodologies are acceptable.
For example, if you own an apartment building and a consultant recommends using lighting, flooring or parking areas in a cost segregation study to accelerate depreciation, the IRS will use the ATG to verify the claims are reasonable. Following the ATG guidelines helps taxpayers safely leverage cost segregation while minimizing audit risk.
While cost segregation remains a powerful way to accelerate depreciation, the 2025 update signals that the IRS is paying close attention to how benefits are calculated and supported.
Key Insights From the IRS Cost Segregation Audit Techniques Guide 2025
The IRS developed the ATG to make the audit process more consistent and structured. This version reflects tax law developments that were current as of its February 2025 publication date, including the Inflation Reduction Act of 2022 (IRA) and the 2017 Tax Cuts and Jobs Act (TCJA). Key updates include:
- Qualified Improvement Property (QIP): Under the TCJA, QIP now encompasses what were previously treated as Qualified Leasehold Improvement Property, Qualified Restaurant Property and Qualified Retail Improvement Property.
- Land Valuation: Updated guidance on accurately determining the depreciable basis of a property, including how to properly allocate land versus improvements.
- Accounting Method Changes: Updated procedures for taxpayers changing their depreciation method, including Form 3115 filings.
- Chapter 8 (New): Addresses the classification of electric distribution systems, a frequent area of dispute. This chapter provides clearer rules on whether internal electrical distribution systems should be classified as five-year, seven-year or 39-year property.
- Residential Rental Properties: New guidance on cost segregation methodology for residential rental properties.
The ATG ultimately aims to reduce confusion and disputes by helping examiners assess risk, determine when expert support is needed, and ensure fair and efficient audits.
Note on Bonus Depreciation
The ATG discusses bonus depreciation in the context of pre-P.L. 119-21 law, including the IRA phase-down schedule. That schedule has since been superseded by P.L. 119-21, which permanently restored 100% bonus depreciation for qualified property placed in service after January 19, 2025. Practitioners should disregard the ATG bonus depreciation percentages for property placed in service under current law.
What the ATG Does Not Cover: QPP and P.L. 119-21
While the 2025 ATG is a necessary guide, it is no longer fully sufficient for cost segregation in the current environment. Three significant developments postdate its February 2025 publication and are not addressed within it, including permanent 100% bonus depreciation, QPP, and the Section 179D sunset.
Permanent 100% Bonus Depreciation
P.L. 119-21 permanently restored 100% bonus depreciation for qualified property placed in service after January 19, 2025. The phase-down schedule referenced in the ATG no longer applies to current-year acquisitions and construction projects. Studies prepared under the current law must reflect this change, and all asset classifications should be evaluated against the permanent 100% rate.
Qualified Production Property Under Section 168(n)
P.L. 119-21 created a new 100% first-year expensing allowance for QPP, defined as nonresidential real property used by the taxpayer as an integral part of a qualified production activity. Qualified production activities include manufacturing, chemical production, agricultural production and refining.
On February 20, 2026, the IRS issued Notice 2026-16, providing the first interim guidance on QPP. Key elements of the notice include:
- Construction must begin after January 19, 2025, and before January 1, 2029.
- Property must be placed in service after July 4, 2025, and before January 1, 2031.
- Original use must commence with the taxpayer. Used property can qualify only under narrow circumstances (not used in any qualified production activity between January 1, 2021, and May 12, 2025).
- The IRS will apply the same "construction begins" standards used for other bonus depreciation purposes, including the 10% safe harbor.
- Areas used for offices, administration, retail, general warehousing, parking or other non-production functions do not qualify.
A cost segregation study is the primary mechanism for documenting QPP claims. The study must map the facility into production versus non-production zones to support the 100% expensing election. Because the ATG does not address QPP, practitioners should rely on Notice 2026-16 and anticipate forthcoming proposed regulations, which the IRS has said will be consistent with the notice.
Section 179D Sunset
The deduction for energy-efficient commercial buildings will be eliminated for projects where construction begins after June 30, 2026. That deadline is approximately four weeks away. Contact Cherry Bekaert's TCIA team immediately if you have qualifying projects.
P.L. 119-21 increased the Section 179D per-square-foot deduction threshold while establishing a firm construction-begins sunset of June 30, 2026. The ATG does not address this change. For any client with energy-efficient construction in progress, the Section 179D deadline requires immediate attention.
Impact of the IRS Audit Techniques Guide on Cost Segregation
With greater scrutiny and increased IRS challenge activity, the 2025 ATG is a vital tool for taxpayer compliance. Key impacts are detailed below.
1. Higher Responsibility for Accurate Documentation
Taxpayers must maintain more detailed records, including invoices, blueprints and cost breakdowns, because the IRS expects every claim to be supported by documentation. Missing or weak documentation can lead to denied deductions or penalties.
2. Increased Importance of Professional Studies
The 2025 update pushes taxpayers toward engineering-based cost segregation studies. DIY tools or estimate-based reports are more likely to be challenged, making professional involvement essential. This is especially true for QPP claims, which require facility zone mapping that software tools cannot perform.
3. Greater Risk If Mistakes Are Made
Incorrect classifications or unsupported claims can result in audits, disallowed deductions and additional tax liabilities. The stakes are higher now that bonus depreciation is permanent and QPP elections involve large first-year deductions on building components.
4. More Clarity, Less Flexibility
The ATG provides clearer rules on asset classification and methodology, reducing confusion. This also means taxpayers have less room for interpretation and must follow stricter guidelines.
5. Better Protection for Compliant Taxpayers
Taxpayers who follow the ATG properly benefit from smoother audits and minimal scrutiny. Well-prepared studies are more likely to be accepted without adjustments.
6. Stronger Tax Planning Opportunities
With clearer guidance and continued benefits like permanent 100% bonus depreciation, taxpayers can confidently use cost segregation as a strategic tool to improve cash flow and reduce taxable income. QPP adds a new dimension for manufacturing and production-oriented clients.
7. Shift to Informed Decision-making
The ATG reflects the IRS's intent to provide a clear framework for claiming legitimate benefits, not to penalize compliant taxpayers. Those who follow the structure can maximize benefits while keeping audit risk low.
How Taxpayers Can Stay Compliant With Evolving Standards
The 2025 ATG signals a clear shift, with cost segregation studies now held to a higher standard. As complexity increases, there is less room for error in asset classification and cost allocation. DIY approaches and low-quality studies carry significantly more risk, as inaccurate or unsupported positions are more likely to be challenged.
An engineering-based approach substantially enhances audit readiness. The IRS has stated that a cost segregation study performed by someone with a construction or engineering background is often more reliable than one performed without that expertise.
For taxpayers with manufacturing or production facilities, the additional complexity of QPP zone mapping under Notice 2026-16 makes professional guidance even more critical. The rules are new, proposed regulations are still pending, and the first studies documenting QPP claims will face close IRS review.
Working with an experienced advisory firm gives investors the best path to identifying all qualifying assets, applying the latest depreciation rules correctly and maintaining audit-ready documentation.
Your Guide Forward
The IRS Cost Segregation Audit Techniques Guide reflects a necessary evolution in tax standards, prioritizing accuracy, transparency and consistency. But navigating cost segregation now requires more than compliance with the ATG alone, especially given the significant developments since the ATG's February 2025 publication, particularly P.L. 119-21 and Notice 2026-16.
Cherry Bekaert can guide you through these changes with an approach tailored to each client's unique situation. Our team combines:
- Licensed engineers and construction professionals.
- Tax professionals with deep knowledge of IRS standards, P.L. 119-21 and Notice 2026-16.
- Experience across bonus depreciation, QPP zone mapping, Section 179D (see the urgent deadline above), energy credits and accounting method changes.
- A commitment to audit-ready, defensible studies.
Connect with Cherry Bekaert's Tax Credits & Incentives Advisory (TCIA) team today to learn more about our Cost Segregation Services and how our advisors can help you maximize tax savings within the current legal framework.
