Cost Segregation in Vermont

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 Vermont comes in.

2. Vermont and federal bonus depreciation

Vermont has decoupled from IRC 168(k) bonus depreciation entirely since 2002 for C corporations (32 V.S.A. 5811(18)(A)) and since 2008 for individuals and pass-through owners (32 V.S.A. 5811(21), which defines Vermont taxable income as federal taxable income determined without regard to Section 168(k)). The disallowance is permanent and structural, so OBBBA's restoration of 100% bonus for property acquired after January 19, 2025 does NOT flow through to Vermont even though Act 164 (H.933, signed June 18, 2026) updated Vermont's conformity date to December 31, 2025. Act 164 went further and also decoupled Vermont from the new IRC 168(n) qualified production property 100% deduction, requiring that property to be depreciated over 39 years for Vermont. Vermont taxpayers claiming federal bonus must keep a second Vermont depreciation schedule using normal MACRS and track a separate Vermont asset basis, which produces a different Vermont gain or loss on disposition.

Year 1: add back the excess of federal depreciation (including bonus) over regular MACRS depreciation on Schedule IN-112, Part I, Line 4 (corporations adjust via their return; pass-through owners pick up their share from Schedule K-1VT). Later years: Vermont MACRS depreciation exceeds federal, so the difference is subtracted on IN-112 Line 9 ('Adjustment for Bonus Depreciation on Prior Year Property') over the asset's remaining MACRS life. Full recovery, timing-only difference; basis and gain/loss are recomputed on the Vermont schedule at disposition. Per TB-44, an underpayment penalty caused by the addback can be waived on request.

3. Section 179 in Vermont

Vermont has never decoupled from Section 179 (TB-44 states this explicitly) and imposes no state-specific cap. Because Act 164 of 2026 adopts the IRC through December 31, 2025, Vermont conforms to OBBBA's increased limits ($2.5M expensing / $4M phase-out for 2025, indexed). One trap from TB-44: treatment must be consistent federal vs. state, so a taxpayer cannot claim bonus federally on an asset and then expense that same asset under 179 for Vermont only; the Vermont fallback for federally bonused assets is regular MACRS.

4. Does it still help in Vermont?

Yes. Vermont fully follows federal MACRS classification and recovery periods (TB-44 directs taxpayers to the "normal MACRS schedule"), so reclassifying components from 27.5/39-year real property into 5-, 7-, and 15-year property still accelerates Vermont deductions substantially; only the 168(k) first-year bonus layer gets added back and recovered over those (short) MACRS lives.

• •Vermont is one of the longest-standing bonus-depreciation decouplers: C corps since the 2002 Job Creation and Worker Assistance Act era, individuals since Act 190 of 2008; the statute simply computes taxable income 'without regard to Section 168(k)'.
• •Because the decoupling lives in the taxable-income definition rather than the conformity date, Vermont's June 2026 conformity update (Act 164 / H.933, IRC as of 12/31/2025, retroactive to TY2025) adopted most of OBBBA but left the bonus disallowance fully intact.
• •Act 164 of 2026 also decoupled from OBBBA's new IRC 168(n) 100% deduction for qualified production property; Vermont requires 39-year depreciation on that property instead, mirroring its 168(k) treatment (addback computed as if the federal 168(k)(7)/(n)(6) election out had been made).
• •Pass-through mechanics are formalized: Vermont entities report each owner's disallowed bonus share on Schedule K-1VT, and owners carry it to Schedule IN-112; nonresidents on Form IN-113 use pre-disallowance federal K-1 amounts in both columns so the apportionment ratio stays clean.
• •Dual-basis consequence: on sale of a bonused asset, Vermont gain/loss is recomputed using Vermont-allowed depreciation, so federal and Vermont basis and gain diverge until the addback is fully recovered.
• •Section 179 is a clean conformity lane with no Vermont cap, but TB-44 requires consistent federal/state treatment, so you cannot swap a federally bonused asset into 179 for Vermont purposes.
• •TB-44 allows case-by-case waiver of the estimated-tax underpayment penalty when the bonus addback caused the underpayment.

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.