As a new self-storage owner who has just purchased your facility, you’ve hired an accountant to help advise you on your financials. You’re all set, right?
Actually, if your financial picture stops with your CPA, you might be leaving quite a bit of money on the table. And the reason involves two words: cost segregation.
If you’ve never heard of it before, don’t worry — you’re not alone. It’s a sophisticated way of calculating asset depreciation that most CPAs don’t do. But if you’re in the self-storage business, cost segregation can put money back into your pocket.
Here’s a primer on what it is and why you should do it.
The IRS’s standard 39-year depreciation
You might be familiar with the fact that the IRS allows business owners to calculate depreciation on their business assets, which reduces the tax burden.
“The IRS has long felt that the reasonable life expectancy of a nonresidential building would be 39 years,” said Heidi Henderson, national director of Engineered Tax Services, a firm that assists self-storage companies with cost segregation analysis.
For example, if you’ve purchased a self-storage property for $500,000, using the standard 39-year depreciation model, you can deduct $12,820, reducing your tax burden.
Different assets depreciate at different rates
However, cost segregation takes a deeper look into a self-storage owner’s assets beyond just the standard 39-year depreciation.
“When you do cost segregation, instead of just viewing a property as a property, we go in and look at all the different assets — the parking lot asphalt, the lights, the furnishings,” Henderson said. “If you have someone do a review, the IRS allows that there are a lot of assets associated with a property that will not last 39 years.”
For example, carpeting would not be expected to last 39 years. Assets such as this can be depreciated separately under a different depreciation formula. For carpeting, it is usually five years, Henderson said. Other assets can be depreciated on a seven or 15-year schedule.
How you can save money
Henderson said it’s quite common to find 20 percent of a business’s assets that would fall in the five-year category. Using the $500,000 business example, $100,000 (instead of just $12,820) can be deducted from your income.
“That alone could give you $20,000 per year,” she said.
Licensed engineering firms like Henderson’s go through businesses carefully mining for these assets, which they know how to properly depreciate.
“Some of the things I’ve found include openings, such as some of the doors, some of the special finishes if they have fancy offices with baseboards and countertops, some of the furnishings, cabinets, a lot of the specific electrical equipment,” she said.
A tax savings windfall could mean that owners could reinvest in purchasing new equipment or additional units for their property.
Most CPAs not equipped to do cost segregation
It’s important to note that the typical CPA will not be prepared to do this type of special assessment, Henderson said.
“Most CPAs will just place your property on a schedule over 39 years because they have no idea how much the curbing costs or how much the entry gate is worth. They don’t know anything about what those items cost, and when someone goes in to buy a building, they don’t know how much those assets cost, either,” she said.
Jeff Greenberger, an attorney who represents storage companies, said cost segregation represents an excellent strategy for saving money on taxes,”
“The whole idea of cost segregation is to depreciate certain assets more quickly than if the facility as a whole is depreciated,” Greenberger said, “In many cases, the cost savings can be significant.”
Greenberger said there are up-front accounting costs, but the savings begin with the next tax return. He says it is at least worth asking for a cost benefit analysis from the cost segregation company to see what the potential advantages are.