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Wednesday, November 13, 2019
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SSA Blog

©2019 by the Self Storage Association (SSA). SSA and SSA Magazine are trademarks of the Self Storage Association, Inc. Opinions expressed by authors and other contributors do not necessarily reflect those of the SSA, publisher or editors, nor do they represent the policy or positions of the SSA. Information contained within articles should not be construed as the primary basis for legal or investment decisions.

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How Can I Reduce My Income Tax Liability To Acquire 33 Percent More Real Estate?

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How Can I Reduce My Income Tax Liability To Acquire 33 Percent More Real Estate?

Forbes refers to self storage as among the most profitable of small businesses, simply because it requires less overhead than other types of businesses. While it’s true that storage facilities don’t require much staff, maintenance or utility usage, other costs associated with owning and operating property of such size can be, well, sizable.

Take federal income taxes. No one wants to pay more taxes than necessary, so it’s worth looking into how you can reduce your tax burden. Knowing what tax deductibles are applicable to your facility, when you can defer tax payments, and which items can be depreciated (and how), can translate to increased cash flow for operating and growing your business.

But identifying those tax benefits yourself can be tedious, not to mention risky if faced with an audit. That’s where engaging a specialist in cost segregation (classifying assets for federal income tax purposes) can help. Sometimes we need to spend money to make money, and in this case, the benefits of hiring a professional who is experienced in tax code, cost estimation, construction processes and self storage management far exceed the fees associated with doing so.

 

How cost segregation works

 

Engineering-based cost segregation is a tax process that enables commercial property owners to re-classify approximately 30-45% of their buildings from real property to personal property.  Real property is depreciated over a 27.5- to 39-year schedule, whereas personal property can be depreciated in 5, 7 and 15 years. Isolating this personal property from the structure allows for shorter depreciation and a reduction in taxes owed.

Such eligible components include: site components (access control); site work (drainage, parking lot, signage, fencing, retaining walls, sidewalks, curbs, landscaping, etc.); and building components (security systems, cabinets/millwork, interior storage unit partitions, rollup doors, signage, slatwall paneling, communication/data, etc.). On top of these examples, when repairing or replacing any building components or structure — such as new doors, HVAC units, roofing, paving, plumbing, lighting, etc. — the remaining life of those components is eligible for write-down.  

This ability to re-allocate an asset and accelerate deprecation time from 39 years to 5, 7 or 15 years enables commercial property owners to leverage income tax refunds as capital that can be redeployed for new acquisitions. That potentially means you can acquire a third more facilities from reduced taxes, yielding $80,000 to $150,000 in cash flow for every $1 million in building value, leasehold improvements and renovations.

Some additional good news is this tax process is retroactive. In other words, if you built or bought a property in previous tax years and did not take advantage of cost segregation at that time, you can do so at anytime and carry forward the tax benefit to your current tax year — all without exposing your prior tax years to audit.

 

New tax laws make cost segregation more valuable

 

The IRS Tax Reform Publication 5318, “What’s New for Your Business,” outlines changes to depreciation for nonresidential real property subsequent to the Tax Cuts and Jobs Act singed into law in 2017. Its passing makes tax and engineering-based studies even more important for uncovering ways to benefit. Bonus depreciation, which allows commercial property owners to partially deduct qualified assets the year placed in service, increased from 50% to 100% on newly-built facilities and 100% on acquisitions of previously built facilities until 2023 under the new law, and now also includes qualified used property.

The new law  has spurred commercial construction, and empowered the economy by putting more people and capital to work.

 

When should you perform cost segregation?

 

As soon as a facility is in service. Once the cost segregation study is complete, your tax professional can advise you about reducing your tax payments or deductions to the IRS, matching your reduced liability, and putting your increased cash flow back to work immediately ─  not waiting for a refund upon the filing of your return.

A cost segregation professional can conduct a no-cost, engineering-based cost segregation analysis of your facility and advise you of the best tax-reduction strategies.

 

 

| Categories: Operations, Legislative / Regulatory, Construction | Tags: Taxes, IRS, Cost Segregation, Cash Flow, Accounting, Depreciation | View Count: (249) | Return
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