For small colocation operators
Cost segregation for colocation data centers (1–10MW)
Multi-tenant facilities, partnership-held common. $10–40M basis. K-1 aware reporting, tenant build-out QIP, Form 3115 §481(a) lookback on prior-year acquisitions.
What changes at colocation scale
Small-to-mid colocation (1–10MW) sits at a structural sweet spot for cost segregation: the basis is large enough that 45–55% reclassification produces seven-figure first-year deductions, the asset mix is heavy on the right components (UPS, CRAH/CRAC, electrical distribution, fire suppression — all 5-year MACRS), and the ownership structure is usually a partnership or LLC where the deduction flows through to investor K-1s.
- Lessor (facility owner) cost seg covers building shell, base-building MEP, cooling infrastructure, facility-process electrical, security, and site improvements.
- Tenant build-out (QIP) sits separately on the tenant's side of the lease boundary — 15-year MACRS + 100% bonus per TCJA / OBBBA. Most engagements are the lessor side.
- K-1 aware reporting — depreciation flows through the partnership tax return; the study report includes a breakdown CPAs can map directly to Form 4562 and §704(b) / §704(c) allocations as warranted.
- §481(a) lookback support — Form 3115 catch-up workpapers for facilities acquired before this tax year that captured pre-2025 bonus depreciation rates (100% / 100% / 100% / 80% / 60%) but were never engineered.
- Partial-disposition analysis for capex cycles where old cooling / electrical / UPS was replaced — recoverable basis on disposed components.
Site visits routine at $3M+ basis when property complexity warrants. Full component analysis at the main hub page.
Worked example: $25M regional colocation engagement
Illustrative; partnership-held, multi-tenant. Depends on basis composition, capex history, ownership structure, §469 status, and CPA's tax position.
- Facility
- Regional colocation operator (partnership-held), ~5MW
- Depreciable basis
- $25,000,000
- Illustrative engineering-estimated reclassification
- 48% = $12,000,000 into accelerated MACRS
- Year-1 deduction
- $9,200,000 (100% OBBBA bonus)
- Estimated federal tax savings
- $3,404,000 at 37% bracket (allocated across partners per K-1)
- Study fee
- $29,995
Realized savings depend on each partner's at-risk basis, §469 passive-activity position, state tax conformity to §168(k), and timing of the deduction relative to the partnership's tax year. Verify with your CPA.
Colocation questions
We own the colocation facility — does cost seg apply to us or our tenants?
Both, separately. The facility owner (you) does cost seg on the building shell + base-building MEP + cooling infrastructure + facility-process electrical. The tenants who build out cabinet space inside your facility (leasehold improvements: their racks, their PDUs, their additional cooling) handle their tenant build-out separately as Qualified Improvement Property (QIP) at 15-year MACRS per TCJA / CARES Act. The two studies don't overlap; they sit on different sides of the lease boundary. Cost Seg Smart can handle either side — most engagements are the facility owner side.
How does cost seg flow through to investors in a partnership-held colocation deal?
Cost segregation accelerates depreciation at the entity level. In a partnership or LLC, the resulting depreciation is allocated to partners per the operating agreement and surfaces on each partner's K-1 (typically Box 2 for rental real estate income/loss, Box 20-AH or similar for §704(b) / §704(c) special allocations). Whether and when individual partners can use the loss depends on at-risk basis (IRC §465), passive-activity limits (IRC §469), and election status. The study is identical regardless of structure; how it lands at the investor level depends on the partnership's tax position. Coordinate with the partnership's CPA before scoping.
Can you handle partial-disposition analysis if we replaced cooling or electrical equipment during a recent capex cycle?
Yes. Partial disposition is the IRS treatment that lets a facility owner write off the remaining basis of a building component when it's removed during renovation — old CRAH/CRAC units swapped for higher-density cooling, old PDUs replaced with new electrical distribution, old UPS systems repowered. Without a cost-seg study, that old basis is buried in the 39-year structure and never recoverable. With a component schedule, the disposed components have identifiable basis that can be written off in the disposition year. Every colocation engagement includes partial-disposition-ready component basis.
What about the tenant build-out (Qualified Improvement Property)?
Tenant build-out interior to a non-residential building, made after placed-in-service, is Qualified Improvement Property (QIP) eligible for 15-year MACRS + 100% bonus depreciation under §168(k). For a colocation operator funding tenant improvements (TIs) as part of a lease incentive, the QIP treatment lets you accelerate that capex into year-1 deductions. Cost Seg Smart studies allocate QIP separately from the base-building basis. Tenant-funded TIs are amortized differently per §168 / §178 / §1019 — verify with the tenant's CPA.
We bought a colocation facility 5 years ago and never did cost seg. Is it too late?
No. Form 3115 (Application for Change in Accounting Method) under automatic-consent in Rev. Proc. 2015-13 may allow a §481(a) cumulative catch-up of previously-missed accelerated depreciation in the current tax year — without amending prior returns. For colocation facilities placed in service 2020–2024 (the high-bonus-depreciation years before OBBBA permanent restoration), the lookback often captures 100% / 100% / 100% / 80% / 60% bonus rates and is the single most valuable cost-seg engagement type. The §481(a) catch-up workpapers are included; your CPA files the Form 3115. Verify with your CPA before filing.
Do you require a site visit?
Site visits are routine at $3M+ basis when property complexity warrants — multi-tenant facilities with non-standard cooling, custom electrical distribution, significant capex history, or unusual MEP. For standard colocation configurations with full as-built drawings, equipment lists, and capex schedules, satellite imagery + structured property documentation may suffice. The IRS Cost Segregation Audit Techniques Guide does not require a site visit; it requires engineering-based classification and component-level documentation.
Talk to us about your colocation facility.
Send the closing statement + capex history and we'll model a same-day preliminary, K-1 allocation included.
Preliminary modeling typically same-day. See cooling depreciation · UPS cost seg · CPA partner program · audit defense