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 a 43–65% 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 asset disposition study (priced add-on) for capex cycles where old cooling, electrical or UPS equipment was replaced: we compute and document the adjusted basis of what came out, subject to the eligibility gates, and your preparer makes the election.

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 compute a partial disposition if we replaced cooling or electrical equipment during a recent capex cycle?
We can compute and document it, as a priced add-on with eligibility gates rather than something every engagement includes. When cooling, electrical or UPS equipment is replaced, the treatment depends on how the old equipment was carried. If a prior study split it out as its own 5-, 7- or 15-year asset, retiring it is a disposition of that asset and no election is needed. If it sat inside the 39-year building as a structural component, its remaining basis keeps depreciating with the building unless your preparer elects under Treas. Reg. §1.168(i)-8 to recognize it, by reporting the disposition on a timely filed original return (including extensions) for the year of removal. Our partial asset disposition study computes the adjusted basis of the removed components ($995 per building, one flat fee). It applies only when the equipment was placed in service by the owner before removal, the filing window for the year of removal is still open, the asset is not in a general asset account, and the equipment was the owner's rather than a tenant's. We compute and document; the preparer makes the election. See pricing for details.
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 mandate a site visit, though it recommends a field inspection for quality studies; what an examiner tests is the classification and component-level documentation.
Free sample report
See a full data center cost segregation report

A complete illustrative study on a $26M colocation facility — ~53% reclassified, P.E. sign-off page (contracted per engagement), MACRS component schedules, and §481(a) workpaper.

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Other data-center segments

Different facility profile? See edge / sub-1MW facilities, enterprise on-prem facilities, or hyperscale engagements — or the data center cost segregation hub for the full pricing ladder and methodology.

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.

Download the data center sample report. Preliminary modeling typically same-day. See cooling depreciation · UPS cost seg · partner program · audit defense