Data Center Owners Leverage Cost Segregation for Tax Savings

Data center construction in the United States has surged, with annual project spending reaching $14 billion in July 2025—a 100% increase over the previous year. This growth is largely driven by the expanding adoption of artificial intelligence and the corresponding demand for computing power.

To optimize tax benefits and manage substantial investments, data center owners are increasingly employing cost segregation analyses. This strategy involves identifying and reclassifying components of a facility into shorter depreciation periods, allowing for accelerated depreciation deductions and improved cash flow.

Under federal tax regulations, nonresidential real property is typically depreciated over 39 years. However, certain building elements, such as electrical and HVAC systems, can qualify for shorter recovery periods of five, seven, or 15 years. The One Big Beautiful Bill Act (OBBBA), enacted in 2025, reinstated 100% bonus depreciation, enabling companies to immediately deduct the full purchase price of eligible assets with a class life of 20 years or less. This provision encompasses many data center components, including specialized equipment and office furnishings.

It's important to note that state-level tax treatments may vary. For instance, California does not conform to federal bonus depreciation rules, which can affect the applicability of these deductions for data centers within the state.

Conducting a cost segregation analysis allows data center owners to itemize project expenses accurately, ensuring compliance with both federal and state tax regulations. This process not only facilitates strategic tax planning but also maximizes available tax savings, thereby enhancing the financial viability of data center investments.