Cost Segregation and the R&D Credit: Same Facility, Two Studies

A precision machining company owns its plant. It develops new processes every year and claims the federal R&D credit for the engineering behind them. It has never had a cost segregation study on the building. That combination is common among manufacturers, engineering and architecture firms, labs and medical device makers, and it leaves value unclaimed. The two studies look at the same facility and claim different costs.

Different questions, different costs

The R&D credit under IRC §41 is computed on qualified research expenses: wages for people doing, supervising or supporting qualified research, supplies consumed in it, the right to use computers, and 65% of contract research. The cost segregation study looks at what the building and its site cost, and which parts can be depreciated faster.

The statute keeps them apart. Supplies for §41 purposes exclude land, improvements to land and property of a character subject to depreciation (§41(b)(2)(C)). Nothing a building study classifies can be a qualified research expense. There is no double dip to worry about in that direction, and no reason not to claim both.

Where they touch

• §174A. Under Treas. Reg. §1.174-2(b)(1), the cost of acquiring depreciable property is not a research expenditure, but depreciation allowances on property used in research can be. If part of the building is a lab or a test cell, the depreciation on that part follows the research rules in the computation. A study that already allocates cost by area and component makes that split straightforward. See the §174A guide.
• New plants. For construction that began after January 19, 2025, the production portion of a new manufacturing building may qualify for the elective 100% deduction for qualified production property under §168(n). Research and office space does not. The study that separates production floor from everything else serves both purposes. IRS guidance on §168(n) is still interim.
• The same records. Both studies rely on the same project file for a new facility: drawings, specifications, contractor pay applications. One document request can serve both.

An order of operations

1. Settle the R&D study’s facts first if both are in the same year, so research areas and research-use equipment are identified once.
2. Run the building study with those areas flagged, so its schedules show where depreciation on research-use property sits.
3. Hand both to the preparer together. The credit lands on Form 6765, the depreciation on Form 4562 (and Form 3115 for a look-back), and the preparer sees one consistent set of facts.

What does not change

Each study stands on its own evidence. The R&D credit still needs the four-part test applied to each business component and contemporaneous records of the work. The building study still needs cost records, a land value and an inspection. Running them together saves time; it does not lower the bar for either.

Read more on the R&D credit for manufacturers, IRC §41 and cost segregation for manufacturers.

Sources

• 26 U.S.C. §41 (Cornell LII): https://www.law.cornell.edu/uscode/text/26/41
• Treas. Reg. §1.174-2 (Cornell LII): https://www.law.cornell.edu/cfr/text/26/1.174-2
• IRS Notice 2026-16, qualified production property: https://www.irs.gov/pub/irs-drop/n-26-16.pdf
• IRS Notice 2026-11, additional first-year depreciation: https://www.irs.gov/pub/irs-drop/n-26-11.pdf