Cost Segregation in Ohio

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 Ohio comes in.

2. Ohio and federal bonus depreciation

Ohio's individual income tax starts from federal AGI, so 100% bonus depreciation flows in initially, but Ohio permanently decouples from IRC 168(k) through an add-back: R.C. 5747.01(A)(17) requires taxpayers (including owners of pass-throughs) to add back 5/6 of all 168(k) bonus depreciation claimed federally, then deduct it back ratably over the following five years under (A)(18). Ohio's March 2026 conformity update (S.B. 9) incorporated the OBBBA generally, including the new 168(n) qualified production property 100% write-off, but it did NOT remove the 168(k) add-back, so post-OBBBA permanent 100% bonus is still only partially usable on the Ohio return in year one. The add-back fraction improves to 2/3 (recovered 1/2 per year over 2 years) if the business increased its Ohio employer withholding 10%+ year-over-year, and worsens to 6/6 (recovered 1/6 per year over 6 years) if the bonus/179 deduction created a federal NOL.

Add back 5/6 of 168(k) bonus (plus 5/6 of Sec. 179 above $25,000), deduct 1/5 of the added-back amount in each of the next 5 years. Variants: 2/3 add-back recovered over 2 years (10%+ Ohio withholding increase); 6/6 add-back recovered over 6 years (federal NOL caused by the depreciation). Timing-only: 100% is ultimately deducted in Ohio.

3. Section 179 in Ohio

Ohio Section 179 cap: No separate state deduction cap; federal 179 limits apply, but Sec. 179 expense above $25,000 is pooled with bonus for the fractional add-back.

Ohio follows the federal Section 179 election and limits (post-OBBBA $2.5M/$4M as incorporated by S.B. 9's conformity date), but R.C. 5747.01(A)(17) requires adding back 5/6 (or 2/3 / 6/6 in the variant cases) of Section 179 expense in excess of $25,000, combined with 168(k) amounts, recovered over the following 5 (or 2 / 6) years. The first $25,000 of 179 expense is fully deductible in year one with no add-back.

4. Does it still help in Ohio?

Yes. Ohio makes no adjustment to regular MACRS, so reclassifying components into 5/7/15-year lives still accelerates Ohio deductions on its own; and even the bonus taken on those short-life buckets is only deferred (5/6 added back, fully recovered within five years), not lost, so a cost seg study still produces real Ohio-side acceleration, just dampened in year one.

• •Ohio's add-back is purely a timing smoother: 100% of bonus/179 is eventually deducted on the Ohio return, unlike states that permanently cap recovery.
• •Add-back fraction is dynamic: 5/6 standard, 2/3 if the business grew Ohio employer withholding 10%+ year-over-year (recovered over just 2 years), 6/6 if the depreciation created a federal NOL (recovered over 6 years).
• •First $25,000 of Section 179 expense escapes the add-back entirely; only the excess (plus all 168(k) amounts) is added back.
• •Business Income Deduction interplay: the add-back and subsequent deductions are business income items, and Ohio's BID exempts the first $250,000 of business income ($125k MFS) with a flat 3% rate above it, so for many rental investors the add-back lands in income that is lightly taxed or fully sheltered anyway.
• •S.B. 9 (signed March 5, 2026) coupled Ohio to the OBBBA's new IRC 168(n) 100% write-off for qualified production property with no add-back, because the add-back statute references only 168(k) and 179; it left the 168(k)/179 add-back intact.
• •Ohio has no general corporate income tax; C corporations pay the gross-receipts Commercial Activity Tax (CAT), where depreciation is irrelevant, so the add-back regime matters for individuals, trusts, and pass-through entity taxes (IT 1140 / IT 4738 apply the same add-back at the entity level).
• •The subsequent 1/5 deductions continue on schedule even after the asset is sold; Ohio does not adjust asset basis for the add-back.

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.