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 Pennsylvania comes in.
2. Pennsylvania and federal bonus depreciation
Pennsylvania does not allow IRC 168(k) bonus depreciation for personal income tax (PA-40) in any amount and never has; the PA DOR states flatly that bonus depreciation is not allowed in calculating PIT taxable income. The November 2025 budget package (HB 416, 2025-26 session) confirmed selective decoupling from the OBBBA: PA adopts neither permanent 100% bonus under 168(k) nor the new 168(n) qualified production property deduction, for either PIT or corporate net income tax, so OBBBA bonus does not flow to PA returns in 2025-2026. For CNIT, corporations add back all 168(k) bonus and instead deduct depreciation computed under MACRS as if bonus had never been enacted (Act 72 of 2018 regime, per Corporation Tax Bulletin 2018-03), with any unrecovered basis deducted when the asset is disposed.
PIT: no addback mechanism exists because PA PIT never starts from federal income; the taxpayer simply computes regular depreciation (straight-line or MACRS without 168(k)) on each asset, creating a separate PA basis. CNIT: 100% addback of federal bonus, replaced each year by normal MACRS depreciation computed without 168(k); any remaining unrecovered basis is deducted in full in the year of sale or disposition (Act 72 of 2018; property placed in service before 9/28/2017 used the older 3/7-of-federal-regular-depreciation recovery formula).
Worked example
A $1,000,000 building, with and without a study
Illustrative only. A residential rental purchased for $1,000,000 of building basis (land excluded), acquired and placed in service after January 19, 2025.
Building basis
$1,000,000
Reclassified to 5, 7, and 15-year property (25%)
$250,000
Federal first-year deduction at 100% bonus
$250,000
Year 1 on that $250,000 without a study (27.5-year straight line)
about $9,100
On the Pennsylvania return, the $250,000 federal bonus deduction is not allowed. PIT: no addback mechanism exists because PA PIT never starts from federal income; the taxpayer simply computes regular depreciation (straight-line or MACRS without 168(k)) on each asset, creating a separate PA basis. CNIT: 100% addback of federal bonus, replaced each year by normal MACRS depreciation computed without 168(k); any remaining unrecovered basis is deducted in full in the year of sale or disposition (Act 72 of 2018; property placed in service before 9/28/2017 used the older 3/7-of-federal-regular-depreciation recovery formula).
Model your own numbers with the tax strategy projector.
3. Section 179 in Pennsylvania
Act 53 of 2022 conformed the PA PIT Section 179 dollar limit to the federal limit for property placed in service in tax years beginning on or after Jan 1, 2023, and PA follows future federal changes automatically, so OBBBA's $2.5M cap / $4M phaseout applies for 2025+. Before 2023, PA capped 179 at $25,000 (2003-2022 placed-in-service years). PA-specific wrinkles per PIT Bulletin 2023-02: the deduction can only offset the net-profits (business) income class, never rental/Schedule E or any other PA income class, and cannot reduce PA net profits below zero; amounts blocked by the business-income limit carry forward indefinitely, but pass-through 179 exceeding the owner-level dollar limit is permanently lost; a PA 179 election is independent of the federal election; unexpensed 179 property cost is depreciated straight-line for PA where PA/federal basis diverge.
4. Does it still help in Pennsylvania?
Yes. PA PIT accepts straight-line or any depreciation method, recovery period, and convention the taxpayer also uses federally, explicitly including MACRS, so a cost seg study that reclassifies building components into 5/7/15-year MACRS lives still accelerates PA deductions; only the 168(k) bonus layer is stripped out (and CNIT likewise runs regular MACRS without bonus), meaning the PA benefit is the shorter-life front-loading rather than year-one expensing.
- •PA has decoupled from bonus depreciation since 168(k) was first enacted in 2002, and the Nov 2025 budget (HB 416) reaffirmed decoupling from OBBBA's permanent 100% bonus and from new IRC 168(n) qualified production property, citing budget cost alongside the phased CNIT rate cuts
- •Corporate history worth telling: Corporation Tax Bulletin 2017-02 briefly disallowed ALL depreciation on 100% bonus property until disposition; Act 72 of 2018 fixed it so corporations deduct normal MACRS as if bonus never existed, with full catch-up at disposition
- •PA PIT capped Section 179 at $25,000 for two decades (2003-2022); Act 53 of 2022 conformed to the federal cap for tax years beginning on or after 1/1/2023 and follows future federal increases automatically, so OBBBA's $2.5M/$4M limits apply
- •PA PIT Section 179 can only offset the net-profits income class (business income); it cannot offset Schedule E rental income or any other PA income class, and cannot create a loss
- •PA PIT income classes are siloed: a rental loss generated by cost-seg-accelerated MACRS cannot offset wages, interest, or business income on the PA-40, and PA individuals have no NOL carryforward, so excess PA rental losses are simply lost for the year
- •PA PIT allows straight-line or any federal method/recovery period/convention including MACRS, but requires minimum straight-line depreciation basis reduction each year even if no deduction is claimed
- •Act 53 of 2022 also conformed PA PIT to IRC 1031 like-kind exchange deferral for exchanges after 12/31/2022, which pairs with cost seg planning for PA investors
- •PA's flat 3.07% PIT rate softens the dollar impact of bonus decoupling relative to high-rate states, but the permanent PA/federal basis difference requires maintaining a separate PA depreciation schedule and computing separate PA gain on sale
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.