Can You Claim Capital Allowances on Buildings?
Reduce your tax liability by identifying the qualifying assets and integral systems that are treated separately from a commercial property's structure.
Depreciation is a tax deduction that allows businesses to recover the cost of certain assets over time. This acknowledges that assets wear out, become obsolete, or lose value as they are used to generate income. By deducting a portion of an asset’s cost each year, a business can lower its taxable profits.
The Distinction Between Buildings and Fixtures
The tax code separates a building from the assets contained within it. You cannot claim immediate deductions for the cost of purchasing or constructing a commercial building. The structure itself—walls, floors, roof, windows, and doors—is considered real property and is subject to a long depreciation schedule, meaning the cost is recovered slowly.
The exception to this rule is “personal property,” or fixtures, inside the building. These are items of machinery and equipment that allow the business to operate. For example, in a warehouse, the sorting machinery, conveyor belts, and specialized lighting are personal property whose costs can be recovered much more quickly.
This distinction separates the passive structure from the active assets used in the business. For example, basic restroom plumbing is part of the building, but piping installed for manufacturing equipment can be classified as personal property with a shorter recovery period. Identifying these assets accelerates tax deductions.
Qualifying Items Within a Property
Electrical Systems
Many components of a building’s electrical system can be classified as personal property. This includes wiring and circuits for specific equipment, like manufacturing machinery or computer networks. It also covers specialized lighting for a business activity, as opposed to general ambient lighting. Control panels and transformers serving qualifying equipment can also be segregated for faster depreciation.
Heating, Ventilation, and Air Conditioning (HVAC)
While the main HVAC unit for general building comfort is part of the structure, certain components may qualify for shorter recovery periods. This applies to systems required for a specific process, such as climate control in a server room or ventilation for industrial equipment. Ductwork directly associated with machinery or a specialized process can also be identified as personal property.
Water and Sanitation Systems
The function of a plumbing asset is the determining factor. Process-related piping, such as that used in a commercial kitchen or a factory for manufacturing, is not considered part of the building’s standard plumbing. This allows for accelerated depreciation. Additionally, assets like commercial-grade water heaters, production sinks, and specialized drainage systems can be separated from the building’s structural cost.
Communication and Security Systems
Assets related to safety and data are treated as personal property. This includes fire alarm systems, security and surveillance equipment like CCTV cameras, and the data cabling required to run a modern facility. These systems qualify for more favorable depreciation schedules because they relate to business operations rather than the building’s function as a shelter.
Specialized Fixtures
This category covers a broad range of assets integral to a specific business. For a retail store, this could include decorative display lighting and custom shelving. In an office, it might involve reinforced flooring for heavy equipment. Other common examples include elevators, escalators, and commercial kitchen equipment, as these items are tied to the business function.
Available Capital Allowance Categories
Once qualifying assets are identified, their cost can be recovered through several depreciation methods. The Modified Accelerated Cost Recovery System (MACRS) is the primary method used for tax purposes. Under MACRS, assets are assigned to property classes with set recovery periods.
The Section 179 deduction allows a business to expense the full purchase price of qualifying equipment in the year it is placed in service. For 2025, the maximum deduction is $1.25 million, with a phase-out threshold when total asset purchases exceed $3.13 million. This applies to tangible personal property like machinery and equipment.
For costs exceeding the Section 179 limit, bonus depreciation may be available. This allows for the immediate deduction of a percentage of the cost of qualifying property with a recovery period of 20 years or less. The bonus depreciation rate is 40% for property placed in service during 2025, decreasing to 20% in 2026 and phasing out in 2027.
Assets not fully expensed under Section 179 or bonus depreciation are depreciated over several years using MACRS. Personal property is classified into 5-year or 7-year recovery periods. In contrast, structural components of a commercial building are depreciated over a 39-year period, resulting in smaller annual deductions.
Making a Claim
To claim these deductions, a business must identify and value all qualifying assets. When purchasing an existing building, this process often requires a specialized engineering-based cost segregation study. This study analyzes construction documents and performs an inspection to separate personal property costs from structural building costs.
The costs of the identified assets are then assigned to appropriate depreciation schedules. For example, assets qualifying for Section 179 are expensed in the current year, while others are categorized into MACRS classes like 5-year or 7-year property. These calculations determine the total depreciation deduction for the tax year.
The final step is to report these deductions on the business’s annual tax return using IRS Form 4562, Depreciation and Amortization. The total from this form is carried over as a deduction on the main business tax form, such as a Schedule C for a sole proprietor or Form 1120 for a corporation.