Mobilize Upcoming Tax Changes to Boost Your Cash Flow: Use Cost Segregation, 179D Tax Incentives & Options to Defer Taxes

Make U.S. tax law work for you. Self-storage operators can benefit significantly from using cost segregation because of the unique types of construction and exterior improvements found on a storage site.

Although taxes are supposed to be one of the only two things that never change in life, tax laws are morphing all the time. As a CPA and an expert on how tax law relates to commercial real estate (including self-storage facilities), I’d like to share some changes to current tax law that could put substantial money in your pocket, especially via cost segregation studies. With a little strategic planning, you can drastically reduce your tax liability and generate retroactive refunds for extra cash flow. 


How Does Depreciation Work?

Depreciation calculates an asset’s reduction in value as time passes, owing to wear and tear. The asset is allocated over a specific period when it’s expected to be useful. According to the IRS, commercial real estate, including self-storage, has a useful period of 39 years; land improvements such as asphalt, parking, landscape, and security fences have a useful allocation of 15 years. Land is considered an asset that doesn’t devalue over time.

Here are the two main options for depreciating real estate:

How Does Cost Segregation Work?

Cost segregation (also known as cost seg) is a federal tax methodology that uses MACRS to accelerate the timetable for property-depreciation deductions. To determine depreciation schedules, a cost seg study identifies and reclassifies personal property assets to shorten depreciation time.  Engineering and tax professionals can help you identify real property assets and uncover which portions of those costs can be treated as real property for accelerated depreciation.  

Under the MACRS methodology, you can identify and reclassify assets in five-, 15- and 39-year class lives, depending on the IRS determination of their actual useful life. Here are some examples:

By commissioning a cost segregation study, you can retain additional cash flow for capital improvements, repairs, or expansion. Self-storage operators can benefit significantly from using it because of the unique types of construction and exterior improvements found on a storage site. The following table shows how depreciation increases drastically when you apply cost segregation vs. straight-line depreciation. And if your tax bill is lower, you can carry forward any unused depreciation amounts until they’re used up.

*To calculate the direct tax savings, take the depreciation amount shown above and multiply it by the effective tax rate you calculated earlier. For example, $556,822.68 x .30 = $167,046.80 in income-tax savings.

The Bonus Depreciation Windfall

Bonus depreciation (a.k.a. cost segregation on steroids) allows an immediate first-year deduction on a percentage of eligible business property. Under the 2018 Tax Cuts and Jobs Act, first-year bonus depreciation was increased to 100%. It applies to any long-term assets placed in service after September 27, 2017. The 100% bonus depreciation amount lasts from September 27, 2017 until January 1, 2023.  After that, first-year bonus depreciation will decrease as follows:

After 2027, alas, bonus depreciation vanishes completely. What else qualifies for bonus depreciation under the new law? Tangible personal property with a recovery period of 20 years or less and components of purchased buildings.

A cost seg study will examine the qualified property you can deduct at the 100 percent rate. What components qualify for bonus depreciation (i.e., immediate expensing)?  Carpeting, appliances, movable buildings, security fencing, landscape, asphalt, and exterior signage. Think of it: you could get more than $300,000 in first-year deductions on a $1 million purchase!

Use the 179D Energy-Efficient Incentive

Don’t overlook the Energy-Efficient Commercial Buildings Tax Deduction (known as 179D), which applies to assets like HVAC, the building envelope, or lighting for climate- controlled units. You can take 179D deductions for new construction and retrofits, but you must be able to reduce total annual energy and power costs by 50 percent compared to a sample building from 2007.  And you’re allowed partial deductions.

The maximum deduction is $1.80 per square foot. You’re allowed partial deductions of $0.60 per square foot/per system if you reduce energy consumption through the building envelope, HVAC, or lighting. In addition, you’re permitted a partial deduction for interim lighting.

The Benefits of the CARES Act: Recoup Your Losses

In March 2020, Congress approved a $2 trillion stimulus package in response to the coronavirus pandemic: the Coronavirus Aid, Relief and Economic Security (CARES) Act, which includes several improvements to cost segregation and other tax changes that benefit tax credits and the treatment of business losses.

But There’s More: Potential New Tax Changes and Options to Defer Taxes

On a macro level, there are potential tax changes that could be coming under President Biden: higher tax rates, a lower estate tax limit, higher capital gains rates, and a potential loss of 1031 exchanges. But as of now, these changes haven’t happened, and considering how the winds of politics can blow, they might never be enacted into law.

That said, let’s focus on options to defer taxes that are currently official parts of U.S. tax law and that you can take advantage of now:

Don’t Leave Your Hard-earned Tax Money on the Table

A word of advice: the arcane world of taxes can be bewildering.  Even most seasoned CPAs are unfamiliar with the tax strategies I’m outlining here, so it can be best to ally yourself with engineering and tax professionals who are conversant with such specialized solutions as cost segregation, bonus depreciation, 179D energy incentives, and NOL carryforwards. But the financial rewards might surprise you.



Heidi Henderson

Heidi Henderson

Tuesday, September 27, 2022 | 1:00pm EDT

Understand the energy updates (179D / 45L) made in the inflation reduction act

The Inflation Reduction Act recently signed into law by the Biden Administration makes major investments in healthcare, domestic energy production and manufacturing, and climate change. This 2-hour webinar will review the areas that specifically impact many areas of the Real Estate Industry.

179D and 45L webinar

Recent Posts

Establishing Your Accounting Firm On Social Media

Establishing your accounting firm’s voice on social media should be a top priority. If your firm doesn’t have a brand guide that includes its tone of voice, now is the perfect time to create one. It doesn’t have to be a full-blown brand guide⁠—just something that helps to establish and maintain a consistent brand voice.

Read More »
employee retention tax credit scams

How to avoid employee retention tax credit scams

A survey by the National Federation of Independent Business (NFIB) found that only 4% of small business owners are “very familiar” with the Employee Retention Tax Credit program. Furthermore, only 32% said they were “somewhat familiar” with the incentive. Scammers are taking advantage of this unfamiliarity to collect high fees from business owners. Unscrupulous companies

Read More »
accounting firms

Tips for Accounting Firms looking to get started on Social Media

Getting started on social media can be confusing and hard to understand. Especially for accounting firms that keep putting it off. Yet it truly is not as bad as it seems. Trust me. I manage over 20 social accounts, many of which I created from scratch. With the busy season behind us, now is the

Read More »

Contact Us