Cost Segregation in Connecticut

1. What a cost segregation study does

A building normally depreciates over 27.5 years (residential) or 39 years (commercial). A cost segregation study breaks the purchase price apart and reclassifies components like flooring, cabinetry, dedicated electrical, and land improvements into 5, 7, and 15-year property, so a large slice of the basis depreciates on much shorter schedules.

On the federal return, that reclassified property also qualifies for bonus depreciation, which restores a 100% first-year write-off for qualifying property acquired and placed in service after January 19, 2025. States set their own rules, which is where Connecticut comes in.

2. Connecticut and federal bonus depreciation

Connecticut fully decouples from IRC 168(k) bonus depreciation. For individual income tax (including partners, LLC members, and S corp shareholders), any federal bonus depreciation deduction must be added back to federal AGI when computing Connecticut AGI (CGS 12-701(a)(20), as amended by PA 18-49), then the taxpayer subtracts 25% of the disallowed amount in each of the 4 succeeding tax years. For the corporation business tax, 168(k) simply does not apply (CGS 12-217(b)(1)); corporations add back bonus and instead depreciate the asset under regular MACRS as if bonus had never been claimed. The OBBBA's permanent 100% bonus (property acquired after Jan 19, 2025) changes nothing on the CT return because the decoupling is categorical, not date-based; in its 2026 session (PA 26-68, secs. 265-266, effective for income years beginning Jan 1, 2026) Connecticut also decoupled the corporation business tax from the OBBBA's new IRC 168(n) 100% deduction for qualified production property, while leaving the personal income tax bonus addback mechanism unchanged.

Individuals/pass-through owners: 100% addback in the year bonus is claimed federally, recovered via a 25%-per-year subtraction over the 4 succeeding tax years (full recovery over 5 years total). Corporations: 100% addback, recovered through regular MACRS depreciation computed without 168(k) over the asset's normal recovery period.

3. Section 179 in Connecticut

Connecticut Section 179 cap: No separate dollar cap; CT allows the federal 179 amount but only 20% of it in year 1.

For tax years beginning on or after Jan 1, 2018, Connecticut requires an addback of 80% of the federal Section 179 deduction (both personal income tax and corporation business tax), with the disallowed 80% recovered at 25% per year over the 4 succeeding tax years. Net effect: 20% of the federal 179 deduction in year 1, then 20% of the federal amount each of the next 4 years. Connecticut does not impose its own lower 179 dollar limit (unlike California's $25k cap); it uses the federal deduction amount as the base for the 80% addback.

4. Does it still help in Connecticut?

Yes. Connecticut makes no modification to MACRS recovery periods or classifications, so reclassifying components into 5/7/15-year property still accelerates the regular depreciation that flows into CT AGI, and even the added-back bonus comes back at 25% per year, meaning the full cost-seg deduction lands on the CT return within 5 years instead of 27.5/39.

• •Connecticut has decoupled from 168(k) continuously since 2017 for individuals (and since 2002 for corporations), so the OBBBA's permanent 100% bonus never reaches the CT return regardless of acquisition date
• •The addback is a deferral, not a disallowance: individuals recover 100% of disallowed bonus via 25%-per-year subtractions over the 4 following years (CGS 12-701(a)(20))
• •Section 179 gets a unique 80/20 split: 20% deductible in year 1, the disallowed 80% recovered 25% per year over 4 years, for both the income tax and the corporation business tax; no separate state dollar cap
• •Corporations recover disallowed bonus differently than individuals: they redepreciate under regular MACRS as if 168(k) did not exist (CGS 12-217(b)(1), SN 2002(10)), rather than the 25%/4-year schedule
• •2026 session (PA 26-68, secs. 265-266): Connecticut decoupled the corporation business tax from OBBBA's new IRC 168(n) 100% deduction for qualified production property, with an interest waiver on resulting estimated-tax underpayments; personal income tax was not touched
• •The addbacks flow through CT pass-through entity returns (CT-1065/CT-1120SI), so partners and S corp shareholders in rental partnerships see the modification on their K-1 equivalents
• •Connecticut also kept delayed R&E (174) conformity: capitalization required for CT corp tax through 2025, conforming to immediate expensing only from 2026
• •Top individual rate is 6.99%, so the cash cost of the 5-year state deferral is small relative to the federal benefit of a cost seg study

5. The exit: recapture and timing

The accelerated deductions come back into view when you sell. Gain attributable to the 5, 7, and 15-year property is Section 1245 recapture, taxed at ordinary rates, and the straight-line depreciation on the building itself is unrecaptured Section 1250 gain, taxed at up to 25%. A study does not create that bill, it moves deductions forward, but the timing of the sale decides how much of the benefit you keep.

Two levers manage the exit. A 1031 exchange defers both flavors of recapture along with the rest of the gain, and simply holding the property lets the time value of the early deductions do its work; most owners want a 3 to 5 year horizon before a taxable sale for the math to stay comfortably positive. Model the exit before you commission the study, not after.