Cost Segregation for Ambulatory Surgery Centers (2026)

Ambulatory surgery centers reclassify at the top of the healthcare range, commonly 40% to 55% of build-out cost. An operating room is a mechanical system with walls around it, and the systems serving it are equipment.

ASCs are also usually physician-owned through a syndicated structure, which makes the passive activity analysis unusually important and unusually favorable.

Medical Gas and Vacuum Systems

Oxygen, nitrous oxide, medical air, and nitrogen distribution, along with the vacuum and waste anesthetic gas disposal systems, serve equipment and patients rather than the building.

Manifolds, source equipment, alarm panels, zone valve boxes, distribution piping, and outlets are five-year property under the functional analysis reflected in Treasury Regulation Sec. 1.48-1(e)(2).

On a four-OR center, the medical gas package alone commonly runs $180,000 to $350,000 installed, and it is routinely buried inside a mechanical contractor's line item.

Operating Room Air Handling

Operating rooms require dedicated air handling with high air change rates, HEPA filtration, positive pressure relationships, and precise temperature and humidity control. This is not building comfort HVAC.

Where an air handling unit and its distribution serve the OR environment specifically, it classifies with the function it serves rather than as general building mechanical. The same applies to the dedicated units serving sterile processing and to the negative pressure systems where present.

General office and waiting area HVAC remains structural. The split requires the mechanical drawings, which is why an engineering-based study matters more here than in simpler property types.

Sterile Processing

Autoclaves and steam sterilizers, washer disinfectors, ultrasonic cleaners, cart washers, and their dedicated steam, water treatment, drainage, and exhaust are five-year property.

Reverse osmosis and deionized water systems serving sterile processing are equipment. So are the stainless casework, sinks, and pass-through systems that make up the department.

Imaging, Surgical Equipment, and Low Voltage

C-arms, surgical microscopes, tables, lights, anesthesia machines, monitoring, electrosurgical units, endoscopy towers and reprocessors, and warming cabinets are five-year property, and most arrive on equipment invoices.

Boom systems and ceiling-mounted equipment columns are equipment, though their structural supports may be building. The distinction should be documented.

Low voltage is substantial: nurse call, clinical communications, camera systems, access control, data cabling, and the integration equipment tying them together. Lead shielding serving imaging equipment can often be classified with that equipment, while the framing and drywall around it remain structural.

QIP Covers the Structural Remainder

ASCs are typically built out in existing medical office buildings. Interior improvements placed in service after the building itself generally qualify as qualified improvement property under IRC Sec. 168(e)(6), with a 15-year recovery period and full bonus eligibility.

That covers partition walls, ceilings, general lighting, and general HVAC. Between five-year property and QIP, an ASC build-out is frequently close to fully deductible in the year it opens.

Note the QIP exclusions. Enlargements, elevators and escalators, and internal structural framework do not qualify and remain on the 39-year schedule.

Worked Example: Four-OR Center

A physician group completes a 16,400 square foot, four-OR ASC build-out for $6,900,000 in construction cost, plus $2,800,000 of medical equipment.

The study allocates construction to five-year property of $3,105,000 (45%), covering medical gas, OR air handling, sterile processing infrastructure, low voltage, casework, and finishes. QIP is $3,381,000 (49%). Non-qualifying structural components are $414,000 (6%). All $2,800,000 of equipment is five-year property.

Under IRC Sec. 168(k), five-year property, QIP, and equipment are all bonus eligible, producing approximately $9,286,000 of first-year deduction against a $9,700,000 total investment.

The Passive Activity Analysis Is Favorable

An ASC is an operating business, not a rental activity. For a physician-owner who performs cases at the center, material participation under Treasury Regulation Sec. 1.469-5T is generally satisfied through the significant participation or facts and circumstances tests, and often through the 500-hour test.

That makes the deduction non-passive and available against practice income and other active income immediately, which is a substantially better outcome than a syndicated real estate investment produces.

For a physician-owner with a small percentage interest who performs limited cases, the analysis is closer and should be documented. Participation hours should be tracked contemporaneously, particularly for owners whose primary practice is elsewhere.

Where the ASC leases its space from a related entity, the self-rental rules under Treasury Regulation Sec. 1.469-2(f)(6) apply to the property company, and a grouping election under Treasury Regulation Sec. 1.469-4 should be evaluated.

Frequently Asked Questions

What percentage of an ASC build-out reclassifies?

Commonly 40% to 55% of construction cost to five-year property, with most of the balance qualifying as 15-year QIP. Between the two, an ASC build-out is frequently close to fully deductible in the opening year.

Is medical gas piping five-year property?

Yes. Manifolds, source equipment, alarm panels, zone valves, distribution piping, and outlets serve equipment and patients rather than the building, and classify with the function they serve under Treas. Reg. Sec. 1.48-1(e)(2).

How is operating room HVAC treated?

Where an air handling unit and its distribution serve the OR environment specifically, with high air change rates, HEPA filtration, and pressure control, it classifies with that function rather than as general building mechanical. Office and waiting area HVAC remains structural.

Can a physician owner use the deduction against practice income?

Generally yes. An ASC is an operating business rather than a rental activity, so material participation under Treas. Reg. Sec. 1.469-5T controls. Physicians performing cases at the center typically satisfy it, making the loss non-passive.

What does not qualify as QIP?

Enlargements of the building, elevators and escalators, and internal structural framework are excluded under IRC Sec. 168(e)(6) and remain on the 39-year schedule. Everything else in a qualifying interior improvement generally qualifies at 15 years with full bonus eligibility.

Cost Segregation for Ambulatory Surgery Centers: Medical Gas, Sterile Processing, and OR Build-Out