By Heidi Henderson
Self-storage owners are missing the boat when it comes to cash flow opportunities they can derive from IRS approved tax strategies. Recent regulations passed by the IRS, coined the Repair Regulations (or Tangible Property Regulations), have created a difficult and complex environment for U.S. businesses. These regulations, along with increased tax rates, have created a greater need for engineering based Cost Segregation analyses, which also aids in maximizing cash flow.
Jeffrey Greenberger, of Katz, Greenberger & Norton states, “I am often concerned that my self-storage clients do not take advantage of the potential for significant tax savings by properly cost segregating their self-storage facility assets. While there is an upfront cost, the savings can be immediate and dramatic, not just in 39 years, as some people seem to believe. I have no idea of the percentage of facilities that cost segregate, but I'm guessing it is extremely low.”
Cost Segregation is the method of accelerating the depreciation of specified items within your property. This is a methodology that has withstood the test of time and held up under IRS scrutiny to become the “preferred method of depreciation” for commercial and multi-family properties. To expound on the already significant benefit of cost segregation, the repair regulations have fostered an environment for continued cash flow! This change has an immediate impact on all property owners and is applicable on all properties both now and on a retroactive basis.
Cost Segregation allows property owners to depreciate certain types of building components and land improvements over a shorter period of time. The benefit analysis below shows the breakdown for an existing Self-Storage property purchased for $1,200,000. You can see below that the actual cash benefit for this property owner is between $36,000 and $59,000 in the first year!
Many people immediately dismiss the concept of Cost Segregation thinking that their CPA would have considered this in their tax planning. In all actuality it is a common misconception that self-storage is not a good candidate for cost segregation, and. Additionally, v very few CPAs have the expertise or resources to perform this type of detailed analysis. Regardless, it is not too late!
Disposition/Partial Asset Disposition (PAD)
The IRS has now issued guidance that allows for property owners to write-off the remaining basis of any asset removed from their property! Historically, when the doors on a self-storage unit are replaced, it is often times prior to the end of the IRS’s useful life of 39 years. So when new doors are installed, the new doors begin depreciating for an additional 39 years, while the old doors also continue to depreciate until the end of their original 39 year life cycle.
Under these new repair regulations, taxpayers can and should identify the remaining basis of the old doors, and take an expense in the current year to dispose of them.
At this point the question arises; if the facility was purchased 15 years ago, how is the remaining basis of those doors determined? The answer to that is: through cost segregation! An engineering based Cost Segregation provider will systematically identify every asset within your property including, windows, doors, roofing materials, wiring, electrical fixtures, cabinets, flooring, and exterior improvements such as curbing, asphalt, landscaping, and fences.
All of this detail allows for on-going disposition each time property improvements are performed.
Repairs & Maintenance / Routine Maintenance
The new repair regulations mentioned above are complex to say the least. These regulations require tedious procedures to defend costs as repairs or routine maintenance. Part of this process includes identifying the size and value of separate building systems such as lighting, HVAC, alarm systems, and fire suppression. With the proper detail of assets, many costs previously capitalized may now qualify as deductible repairs. This is yet another opportunity to for taxpayers to reduce their federal and state tax liability, thereby bringing in additional cash flow!
Heidi Henderson is with Engineered Tax Services, a licensed Engineering firm specializing in detailed fixed asset studies, Cost Segregation, Energy efficient building incentives and Research & Development tax credits. If you have any questions or would like a complimentary cost benefit analysis, please contact ETS at 800-236-6519.