# Cost segregation for manufacturing plants, warehouses and distribution

What a study examines at a plant, warehouse or distribution center: process systems, docks, site work, and the new elective 100% rule for production property.

## Short answer

Industrial property spans a wide range: a bulk warehouse with little more than a slab, walls and a roof; a distribution center with conveyors, docks and racking; and a manufacturing plant where much of the cost is process equipment and the systems that serve it. The building itself is nonresidential real property with a 39-year life. What changes from one facility to the next is how much of the cost is something other than the building. Production machinery, process piping and wiring, equipment foundations, special-purpose structures that function as part of the equipment, and material-handling systems may be section 1245 property with recovery periods set by the activity class. Site work, such as truck courts, paving, rail spurs, fencing and drainage, is generally 15-year property unless a manufacturing activity class specifically includes it. For new manufacturing buildings, the 2025 law added an elective 100 percent allowance for qualified production property that a study can help support. This article covers what an industrial cost segregation or warehouse cost segregation study examines, the evidence it needs, the pitfalls and how it fits with your tax adviser's work. It is general education, not tax advice.

## What a study examines at an industrial facility

| Component group | Typical treatment to examine | Examples |
|---|---|---|
| Land | Not depreciable | The site |
| Building shell and systems | 39-year nonresidential real property | Foundations, slab, structure, roof, walls, general lighting and power, central HVAC, fire sprinklers, restrooms, offices |
| Production machinery and process systems | Section 1245 property; recovery period from the activity class | Machinery, process piping, compressed air, dedicated electrical, equipment foundations and pits, process cooling |
| Special-purpose structures | May be outside the definition of a building on their facts | Storage tanks, silos, structures that are essentially equipment or are replaced with the equipment they house |
| Material handling | Often section 1245 property on its facts | Conveyors, sortation, cranes and hoists, compactors and balers, movable racking |
| Loading docks | Mixed | Dock structure, levelers, bumpers, seals and overhead doors are commonly building components; equipment at the dock is examined separately |
| Site improvements | Generally 15-year land improvements, unless an activity class includes them | Truck courts, paving, trailer parking, rail spurs, fencing, site lighting, storm drainage, landscaping |

The rows show where the questions usually land, not answers for your facility. Every line should carry its reasoning.

## Manufacturing: the activity class and the "integral part" test

Two rules make manufacturing studies different from other property types.

**First, section 1245 reaches beyond ordinary equipment.** It includes other tangible property, other than a building and its structural components, used as an integral part of manufacturing, production or extraction, and research or storage facilities used in connection with those activities. The regulations also exclude from the definition of a building a structure that is essentially an item of machinery, or one so closely tied to the property it houses that it can be expected to be replaced along with that property; storage tanks, silos and grain bins are the regulation's examples. Equipment foundations, process pits, and enclosures built for a specific line are examined under these rules.

**Second, the activity class sets the recovery period.** Manufacturing assets are classified by the activity in which they are primarily used, under the activity classes in Rev. Proc. 87-56 reproduced in Publication 946. Some manufacturing activity classes specifically include land improvements, which then take that class's recovery period rather than 15 years; others do not. The IRS guide works through this with examples, and notes that land improvements tied to administrative or retail activities stay in the general 15-year class. A study of a plant should name the activity class it used and explain why.

Other items needing a written analysis:

- **Electrical.** The IRS guide describes a functional allocation: circuits serving lighting, general outlets and HVAC stay with the building; circuits supplying production equipment may be section 1245 property.
- **HVAC and process cooling.** Central HVAC is a structural component. Machinery whose sole justification is meeting temperature or humidity requirements essential for operating other machinery or processing materials or foodstuffs is not. Clean rooms, controlled-environment production areas and process cooling are where this test matters.
- **Mezzanines and platforms.** Whether a platform is part of the building or part of the equipment it supports depends on how it is built and used.

## Warehouses and distribution centers

A bulk warehouse has fewer short-life components than a plant, and most of the analysis is site work and docks. The regulation names warehouses as buildings. Truck courts, trailer parking, drives, fencing, gates, lighting and drainage are generally 15-year land improvements, and distribution sites have a lot of them.

The IRS guide's retail matrix, which is examiner guidance rather than law, illustrates the dock question: dock structures, permanently installed levelers, bumpers, seals and overhead doors are treated as building components, while compactors, conveyors, hoists and balers are treated as section 1245 property. Material-handling systems in a distribution center, such as conveyors and sortation, are commonly section 1245 property, with the recovery period depending on the activity; equipment used in wholesale distribution falls in asset class 57.0. Storage racking that is not part of the building structure is examined as equipment; racking that also supports the roof or walls raises a different question.

## Qualified production property under the 2025 law

The 2025 law added an elective 100 percent allowance for qualified production property, which is a portion of nonresidential real property, the building itself, not only the equipment. In summary, the portion must be used by the taxpayer as an integral part of manufacturing, production or refining of tangible personal property that involves a substantial transformation; its original use must begin with the taxpayer; construction must begin after January 19, 2025 and before January 1, 2029; and it must be placed in service before January 1, 2031. Portions used for offices, administrative services, lodging, parking, sales, research, software development or engineering are excluded. Property a lessor leases to a manufacturer is not treated as used by the lessor in production. If the property's use changes within 10 years, the deduction is subject to recapture.

A cost segregation study is useful here because the election applies to a portion of a building, and someone has to measure and document which portion is production space and which is excluded. Whether to make the election, and how current IRS guidance applies, is for your tax adviser.

## Evidence and documentation that matter

- **Construction records:** schedules of values, pay applications, change orders, and subcontractor invoices by trade, with indirect costs such as design fees, permits and general conditions capitalized under section 263A and allocated by a stated method.
- **Drawings:** architectural, structural, electrical, mechanical and process drawings, and equipment layouts showing which systems serve which lines.
- **Equipment documentation:** installation specifications and vendor quotes that explain foundations, power and utilities.
- **A description of the activity**, so the practitioner can identify the right activity class, and for qualified production property, floor plans showing production and excluded areas.
- **A site visit**, including the production floor, docks and site work.

## Common pitfalls

- **Using 15 years for land improvements** at a plant whose activity class specifically includes them, or using the activity class when it does not.
- **Treating all plant electrical or HVAC as process equipment** without the functional allocation and sole-justification analysis.
- **Ignoring structures that may be equipment**, such as tanks and silos, or treating ordinary building space as one.
- **Mixing owner and tenant assets** in a leased industrial building.
- **Missing replacements.** A re-roofed warehouse or a reconfigured line creates new assets, and the retired portions may be partial dispositions.
- **Relying on an industry average.** The IRS guide specifically warns examiners about studies built on average percentages for manufacturing facilities.

## How the study fits with your tax adviser's work

The study identifies, classifies and supports. Your tax adviser decides which elections to make, including bonus depreciation, elections out by class, and the qualified production property election; how a look-back study is filed through a change in accounting method; how passive activity rules apply to an owner who leases the building; and what recapture looks like on sale or on a change of use. State conformity to federal depreciation rules varies.

## Questions to ask a practitioner

1. Which activity class will you use, and does it specifically include land improvements?
2. How will you allocate the electrical and mechanical systems between building and process?
3. How will you analyze tanks, pits, platforms and enclosures?
4. Will you review equipment specifications and process drawings?
5. For new construction, can you measure and document production and excluded areas for qualified production property?
6. Will the asset list support later partial dispositions?
7. Who signs the report, and will you support it on examination?

## Questions people also ask

### Is a warehouse 39-year property?

Yes. The regulations name warehouses as buildings, and a warehouse is nonresidential real property. Site work, equipment and dock equipment may have shorter lives.

### How is manufacturing facility depreciation different?

Manufacturing assets take the recovery period of their activity class, some activity classes include land improvements, and section 1245 reaches property used as an integral part of manufacturing.

### What is qualified production property?

An elective 100 percent allowance for the production portion of a new nonresidential building meeting the dates and use tests in section 168(n), with offices and other listed uses excluded and a 10-year recapture rule.

### Can a landlord claim qualified production property?

The Code provides that property used by a lessee is not treated as used by the lessor in a qualified production activity. Ask your adviser how that applies to your structure.

### Does bonus depreciation apply to industrial property?

To qualified property with a recovery period of 20 years or less, at 100 percent for qualified property acquired after January 19, 2025. The building is not qualified property unless the separate qualified production property rule applies.

## Sources

- https://www.law.cornell.edu/uscode/text/26/1245 — 26 U.S.C. §1245(a)(3).
- https://www.law.cornell.edu/cfr/text/26/1.48-1 — 26 C.F.R. §1.48-1(c) and (e), tangible personal property, building and structural components.
- https://www.irs.gov/publications/p946 — IRS Publication 946 (2025), How To Depreciate Property: Chapter 4; Appendix B, Tables B-1 and B-2.
- https://www.irs.gov/pub/irs-pdf/p5653.pdf — IRS Publication 5653, Cost Segregation Audit Techniques Guide (Rev. 2-2025): Chapters 3, 6.C, 7.B and 8.A.
- https://www.law.cornell.edu/uscode/text/26/168 — 26 U.S.C. §168(n), special allowance for qualified production property.
- https://www.irs.gov/newsroom/treasury-irs-issue-guidance-on-the-additional-first-year-depreciation-deduction-amended-as-part-of-the-one-big-beautiful-bill — IR-2026-06 (January 14, 2026), bonus depreciation guidance.
- https://www.law.cornell.edu/uscode/text/26/263A — 26 U.S.C. §263A.
- https://www.law.cornell.edu/cfr/text/26/1.168%28i%29-8 — 26 C.F.R. §1.168(i)-8, partial disposition election.

## Related reading

- [What a cost segregation study does](/articles/what-a-cost-segregation-study-does)
- [Construction cost support in a cost segregation study](/articles/construction-cost-support)
- [Bonus depreciation and cost segregation after the 2025 law](/articles/bonus-depreciation-and-cost-segregation)
- [Cost segregation red flags: what examiners and reviewers look for](/articles/cost-segregation-red-flags)
- [How to hire a cost segregation practitioner](/articles/how-to-hire-a-cost-segregation-practitioner)

To find a practitioner, search the [NBCSS directory](/directory) or browse [cost segregation specialists by state](/cost-segregation-specialists).

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Published: 2026-10-01 · Last content change: 2026-10-01
Not professional advice: general educational information from the National Board of Cost Segregation Specialist (NBCSS); not accounting, tax, legal, financial, investment or engineering advice. Verify with a licensed CPA, enrolled agent, attorney or other qualified adviser before acting.