Functional Allocation: Why You Cannot Reuse Another Building’s Percentage

Can an electrical allocation percentage from another property be reused in a cost segregation study? The 2025 IRS Cost Segregation Audit Technique Guide describes functional allocation as an engineering analysis based on the electrical demand loads of the property being studied. The methodology can be applied across properties, but the resulting percentage depends on the actual qualifying loads, building loads, electrical configuration, and supporting information for that property. This is why a percentage appearing in an ATG example, court case, prior study, or similar building should not simply become the allocation factor for a different property. For CostSegRx engineers, the percentage is an output of the property-specific electrical analysis, not an assumption used to begin it.

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Key Takeaways

• Functional allocation uses electrical demand to allocate shared primary and secondary EDS costs between § 1245 property and § 1250 property.
• The allocation percentage is derived from the demand loads and electrical design associated with the property being studied.
• A percentage from an ATG example, court case, prior study, or another property does not automatically establish the correct percentage for a different building.
• Engineers need property-specific equipment information, electrical documentation, end uses, and applicable demand factors to support the calculation.
• The functional allocation methodology can be reused, while the resulting percentage must be supported by the subject property's electrical facts.
• Applying another building's percentage to the same EDS cost can materially change the basis assigned to § 1245 property without changing the underlying engineering facts.
• A defensible functional allocation percentage should be calculated from the building being studied rather than selected from a convenient precedent.

What Is an Electrical Functional Allocation Percentage?

A building's primary and secondary electrical distribution systems can serve many different types of property.

The same upstream infrastructure may support general lighting, HVAC, ordinary receptacles, elevators, specialized machinery, production equipment, and other electrical loads.

Because the infrastructure is shared, the cost associated with qualifying § 1245 property cannot necessarily be identified by tracing one dedicated conductor.

Functional allocation provides a methodology for analyzing that shared system.

The ATG describes an engineering approach based on electrical demand loads.

The engineer identifies the applicable demand associated with qualifying § 1245 property and evaluates it in relation to the applicable demand of the electrical distribution system.

That relationship produces a supported allocation percentage.

The percentage can then be applied to the supported cost of the primary and secondary EDS to determine the portion associated with § 1245 property and the portion associated with § 1250 property.

The important point is where the percentage comes from.

It comes from the electrical analysis.

It is not supposed to be selected first and justified afterward.

Why Is the Percentage Specific to the Property?

Buildings that appear similar can have very different electrical designs.

Consider two manufacturing facilities of approximately the same size.

One may contain electrically intensive production machinery.

The other may use processes powered primarily by natural gas, compressed air, hydraulics, or other systems.

Even two facilities performing similar operations can have different equipment.

Motor sizes can differ.

Production lines can differ.

Operating configurations can differ.

HVAC systems can differ.

Lighting loads can differ.

Transformer arrangements can differ.

Distribution voltages can differ.

Demand factors can differ.

The proportion of the electrical system serving qualifying property can therefore differ.

The ATG's methodology is designed to capture those electrical facts.

That is why the percentage is an output of the analysis.

The engineer first determines what the system serves and the applicable demand loads.

Only then can the relationship between qualifying demand and the applicable total demand be established.

Can You Use a Percentage From an ATG Example or Court Case?

An example can demonstrate a methodology without creating a universal percentage.

That distinction is critical.

The ATG includes a supermarket illustration of functional allocation.

In that example, the demand analysis results in 38.4% of the applicable electrical demand being associated with § 1245 property.

The ATG then applies that percentage to a $1,000,000 electrical distribution system, producing $384,000 associated with § 1245 property and $616,000 associated with § 1250 property.

Those numbers are useful because they show how the methodology works.

They do not establish that supermarkets generally have a 38.4% electrical allocation.

Likewise, percentages appearing in historical court cases need to be understood in their factual context.

The electrical systems, equipment, loads, engineering evidence, and legal issues in those cases belonged to those taxpayers and properties.

Copying the resulting percentage into a different property skips the engineering step that produced the percentage.

The same problem arises with prior cost segregation studies.

A percentage supported for Property A does not automatically become support for Property B merely because the buildings share an industry classification or similar square footage.

The method can inform the next analysis.

The percentage cannot substitute for it.

What Property-Specific Evidence Should Engineers Examine?

A property-specific allocation begins with property-specific evidence.

CostSegRx engineers may examine electrical one-line diagrams, panel schedules, equipment schedules, construction drawings, electrical specifications, connected loads, demand factors, transformer information, switchgear, feeder sizes, conductor sizes, breakers, and actual equipment served.

Field investigation can help confirm whether the drawings accurately represent the installed system.

The engineer can identify the major loads.

The engineer can determine which loads relate to qualifying § 1245 property and which relate to § 1250 property.

The engineer can also determine where those loads connect to the distribution system.

This matters because the ATG's functional allocation methodology applies to the primary and secondary EDS, not indiscriminately to every electrical component in the building.

As discussed in Branch Circuits vs. Building EDS, downstream branch circuits and hook-ups require a different analysis from the shared primary and secondary distribution system.

Likewise, Demand Load vs. Energy Use explains why annual kWh consumption should not be substituted for the demand analysis used in functional allocation.

Together, those engineering boundaries help determine what information belongs in the calculation.

What Can Be Reused From One Functional Allocation Study?

The methodology can be reused.

The percentage generally cannot simply be carried over.

That distinction makes functional allocation scalable without turning it into a rule of thumb.

An engineer can consistently follow the same analytical process:

Identify the primary and secondary EDS.

Identify the relevant end uses.

Determine the applicable electrical demand loads.

Separate demand associated with qualifying § 1245 property from demand associated with § 1250 property.

Calculate the supported relationship.

Apply the resulting percentage to the supported EDS cost.

Document the calculation and source information.

That framework can be applied to a supermarket, manufacturing facility, hospital, restaurant, or another commercial property where functional allocation is appropriate.

But the inputs change with the property.

And when the inputs change, the result can change.

This is one reason electrical distribution systems in cost segregation studies require engineering analysis rather than a standard percentage assigned by property type.

The repeatable element is the process.

The property-specific element is the result.

How Much Can a Borrowed Percentage Change the Allocation?

Illustrative example only. Actual classifications, electrical characteristics, demand factors, costs, recovery periods, depreciation deductions, and tax results depend on the specific property, engineering analysis, documentation, applicable authority, and taxpayer circumstances.

Assume a commercial facility has $1,200,000 of supported primary and secondary EDS cost.

Now assume someone finds a prior study for a superficially similar facility where 40% of the shared EDS was allocated to § 1245 property.

Applying that borrowed percentage would produce:

$480,000 associated with § 1245 property.

$720,000 associated with § 1250 property.

But now CostSegRx engineers analyze the actual subject property.

The equipment schedules differ.

The production equipment has lower electrical demand.

A larger proportion of the system serves building HVAC, lighting, and other § 1250 property.

Assume the supported demand analysis for the subject property instead produces a 25% allocation to § 1245 property.

Applied to the same $1,200,000 EDS cost, that produces:

$300,000 associated with § 1245 property.

$900,000 associated with § 1250 property.

The borrowed percentage would have shifted an additional $180,000 into § 1245 property.

Nothing about the $1,200,000 EDS cost changed.

The difference came entirely from using an unsupported percentage instead of the subject property's electrical demand.

The opposite could also occur.

A borrowed percentage might understate the qualifying demand of a property with unusually electrical-intensive business equipment.

That is why the objective is not to maximize the percentage.

The objective is to calculate the percentage supported by the property's electrical facts.

What Makes a Functional Allocation Percentage Defensible?

A functional allocation percentage becomes meaningful when its inputs can be explained.

What electrical system was included?

What property did that system serve?

Which demand loads were identified?

Which loads were associated with qualifying § 1245 property?

Which loads were associated with § 1250 property?

What demand factors or engineering assumptions were used?

What drawings, schedules, calculations, specifications, and field observations support those inputs?

How was the final percentage calculated?

Those questions transform a percentage from a number into an engineering conclusion.

A percentage copied from another building may look precise.

Precision is not the same as support.

The ATG's methodology provides a repeatable way to analyze shared electrical distribution systems, but the calculation has to reflect the property actually being studied.

For CostSegRx engineers, that means starting with the electrical system rather than starting with the desired percentage.

The functional allocation method can transfer from one property to another. The percentage cannot. The percentage must come from the electrical demand and design of the property actually being studied.