Raise the BAR: Integrating TPR Compliance with Cost Segregation for Maximum Tax Savings in 2026

In the evolving landscape of tax regulations, Tangible Property Regulations (TPR) continue to play a pivotal role in determining how businesses treat expenditures on tangible assets like buildings and equipment. The BAR test (Betterment, Adaptation, Restoration) remains the cornerstone for classifying costs as either immediately deductible repairs or capital improvements that must be depreciated over time. Established under the final regulations (Treas. Reg. § 1.263(a)-3) effective since 2014, these rules have seen no major overhauls through 2026, but their interplay with other strategies has never been more powerful.

At Veritax Advisors, we strategically apply Tangible Property Regulations in conjunction with cost segregation studies to create meaningful tax efficiencies through accelerated depreciation, increased deductions, and a lower risk profile. Cost segregation reclassifies portions of a building's cost basis into shorter depreciable lives (e.g., 5-, 7-, or 15-year personal property vs. 27.5 or 39-year building life), often identifying 25-45% of a property's basis for faster recovery. When combined with TPR analysis, this approach ensures that improvements are properly evaluated under the BAR test while optimizing the entire asset portfolio for tax efficiency. This is especially timely in 2026 with the restoration of 100% bonus depreciation under the One Big Beautiful Bill Act (OBBBA).

Our interdisciplinary team of tax professionals and engineers conduct integrated studies that analyze the building envelope, systems, and components. This seamless process spans qualitative reviews (e.g., Unit of Property determinations) and quantitative modeling, from initial feasibility assessments to full implementation. By aligning TPR compliance with cost segregation, clients can expense routine maintenance under safe harbors, capitalize improvements accurately, and then apply accelerated depreciation (including 100% bonus) to reclassified assets potentially generating millions in upfront tax savings!

Raise the “BAR” – and Synergize with Cost Segregation

The BAR test evaluates whether costs improve a Unit of Property (UoP), such as a building or its structural components. If they meet any criterion, the expenditure is capitalized and added to the asset's basis, where cost segregation can then break it down for faster depreciation. Here's how it works, with synergies highlighted:

• The “B” is for Betterment: Costs that ameliorate a material defect, materially increase value, or enhance capacity, efficiency, strength, productivity, quality, or output must be capitalized.
  Example: Reinforcing a rooftop to support additional HVAC units or solar panels constitutes a betterment, requiring capitalization.
  Cost Seg Synergy: In a cost segregation study, engineers dissect these enhancements (e.g., potentially classifying parts of the HVAC system as 5- or 7-year property eligible for 100% bonus depreciation in 2026) accelerating recovery far beyond straight-line methods over 39 years.
• The “A” is for Adaptation: Improvements adapting the UoP to a new or different use from its original purpose when placed in service are capitalized.
  Example: Converting manufacturing space into a showroom adapts the property to a non-original function.
  Cost Seg Synergy: Adaptations often involve reconfigurable elements like interior finishes or electrical systems, which cost segregation can reclassify into shorter lives. Paired with TPR's partial disposition rules, you can deduct the basis of retired components while bonus-depreciating the new ones at 100%.
• The “R” is for Restoration - capitalize costs for:
  • Replacing a component after deducting a loss, sale (with basis adjustment), or casualty.
  • Restoring to "like-new" condition after class life ends.
  • Replacing a major component, substantial structural part, or significant portion of a UoP or building system.
    
• The cost involved in returning property to ordinary operating condition after deterioration are restorations, but routine maintenance for normal wear (e.g., patching a roof to extend its useful life) is typically deductible.
  Cost Seg Synergy: Restorations of building systems (e.g., plumbing or electrical) feed directly into cost segregation, where discrete components are identified and depreciated over 15 years or less. With 100% bonus depreciation reinstated effective 01/20/2025 (reversing the prior phase-down from 40% in 2025 to 20%), these capitalized costs can be fully expensed in year one, amplifying cash flow.
• De Minimis Safe Harbor: Expense items up to $2,500 per invoice (or $5,000 with an Applicable Financial Statement). This is ideal for small repairs before BAR analysis.
• Routine Maintenance Safe Harbor: Deduct recurring costs to maintain efficiency, even on major components.
• Small Taxpayer Safe Harbor: For buildings, expense up to $10,000 or 2% of unadjusted basis annually.

Don't overlook TPR safe harbors to further enhance deductions:

The real power lies in integration: A single engineering-led study can satisfy IRS requirements for both TPR (e.g., documenting UoP and BAR) and cost segregation (e.g., detailed component breakdowns per Rev. Proc. 87-56). This minimizes audit risk, as the IRS increasingly scrutinizes these areas, and maximizes benefits under OBBBA's 100% bonus, making 2026 a prime window for action.

Whether you're a real estate investor, developer, or business owner, combining TPR compliance with cost segregation isn't just smart, it's essential for sustainable tax optimization. At Veritax Advisors, we've helped clients recover millions through these synergies.

Let's turn your property investments into immediate savings, reach out today!