Recap of Part 1: Federal Tax Savings Opportunity
In our last post, we laid out a scenario on the acquisition of 701 E. Ball Road in Anaheim utilizing the combination of cost segregation and bonus depreciation. Click here to review. Our model yielded a staggering federal tax savings in year 1 of $3,277,188, allowing a potential buyer to recover over a third of his down payment. This approach is made possible by recent legislation passed by Congress known as the One Big Beautiful Bill Act of 2025 (OBBBA).
How Bonus Depreciation Enhances Investment Strategy
While cost segregation (which allows for accelerated depreciation on certain building components) has been around for some time, the new bonus depreciation rules turbocharge the tax savings in the early years. Click here to read our previous posts on the Ball Road acquisition strictly from a federal tax perspective.
By recovering acquisition capital in year 1 through tax savings, it can be redeployed to fund other investments, including building improvements, equipment purchases, and other capital expenditures, which are also eligible for bonus depreciation at the federal level. Thus, the new rules soften the impact of expenses made to position a business for growth and improved probability. In essence, it is a winning proposition for anyone acquiring commercial property or investing in their business.
Shifting Focus: California State Tax Treatment
In our last post, we looked at the Ball Road acquisition strictly from a federal tax perspective. Today we focus on how the State of California’s Franchise Tax Board (FTB) treats the same scenario.
What California Allows: Cost Segregation Benefits
The good news is that the FTB recognizes and allows the cost segregation depreciation methodology. So, a buyer would still be able to depreciate building components that are designated as having a useful life of 5, 7 or 15 years. In our Ball Road scenario, we estimated conservatively that 20% of the total depreciable basis would be eligible for cost segregation. On the federal side of the tax ledger, all of that could be written off in year 1 using bonus depreciation.
What California Does Not Allow: Bonus Depreciation Limitation
Now for the bad news, the State of California, unlike many other states across the country, opted not to go along with the federal bonus depreciation rule for calculating state income tax. Instead, the FTB just allows the cost segregated components to be depreciated over their designated useful life. This is still a significant benefit but falls well short of the federal tax benefit.
Breakdown of Depreciation by Asset Class
5-Year and 15-Year Components
In our Ball Road model, 9% of the total depreciable basis ($3,870,000) has a 5-year useful life, while 11% of the depreciable basis ($4,730,000) has a 15-year useful life.
39-Year Structural Depreciation
The remaining 80% of the basis ($34,400,000) is designated to the structure and is depreciated over 39 years using straight-line depreciation. So, the cost segregation method for the state tax return saves the same amount, but it is spread over a much longer time, reducing the upfront benefit.
State vs Federal Tax Savings Comparison
Under this scenario, the 1st year depreciation on the FTB tax return would be $1,971,400. Assuming a marginal state tax bracket of 13.3%, first-year state tax savings would be $262,194. Add that to the Federal tax savings in year 1 of $3,277,188, and the grand total of state and federal tax savings is a whopping $3,539,382 in year 1, with accelerated depreciation at the state level continuing in subsequent years for the cost-segregated building components.
Final Thoughts on California’s Tax Position
Clearly, we were hoping that California would decide to mirror federal tax guidelines, as it already does, but the overall benefit is still truly amazing and is certain to be a market game-changer going forward. Some have already taken advantage of the new federal rules, as they are retroactive to January 20, 2025. So, if you are in the midst of finalizing your taxes for 2025 and bought property or made other capital purchases for your business, make sure that your tax professionals are using the new rules. It will save you a bundle!
Call to Action: Get Your Custom Tax Savings Model
Please give us a call if you have an interest in seeing a cost segregation/bonus depreciation model on a property that would fit your needs. In short order, we can give you an estimate of potential tax savings for you to share with your financial advisors.
What’s Coming Next
In our next post, we will take a look at an actual cost segregation analysis prepared by licensed engineers to further familiarize you with the process. Stay tuned.