[ by Gabriel Magee, Recovery Solutions Group ]
Like all business owners, self-storage operators are always looking for ways to increase their bottom line. While we all know that increasing occupancy and cutting general operating costs will help to achieve that goal, an often overlooked opportunity is doing a cost segregation study in order to lower your tax burden.
While everyone is familiar with the concept of depreciation, cost segregation is like depreciation on steroids. Per the IRS, assets can be depreciated over a shorter life when properly identified by a professional engineer–this applies whether you built or acquired the facility. This time schedule could be as long as 39 years and as short as five. Many of the items on a self-storage facility’s depreciation schedule are trapped in a 20-to-39-year timeline. Cost segregation studies identify property that is eligible to be depreciated over a shorter time period.
Reclassifying assets to a shorter life (reducing this time line) allows you to significantly accelerate the depreciation on your facility. Of course, accelerating depreciation will lower your net income, resulting in a lower tax burden. Another way to put it: cost segregation allows you to increase cash flow that would normally be spread out over a 39-year period.
As stated above, pursuing cost segregation can have a significantly positive impact to your cash flow. This additional cash flow can help you reduce your debt, or it could be the additional money needed to get your next facility. The beauty of cost segregation studies is that they pay for themselves while freeing up additional cash.
Typically, the ideal facility would have been owned by the current operator for less than 15 years, and the larger the facility, the larger the opportunity. However, any facility with 60 units or a depreciable basis of more than $250,000 should at least be considered. Most studies provide a 3:1 to 5:1 return on investment for our clients.
When a cost segregation study is conducted correctly, a detailed engineering approach by a qualified individual (typically a degreed professional engineer) is used to generate the report. The engineer will work in conjunction with the CPA to complete the report and maximize the benefit. These cost segregation studies are 100% defensible to the IRS.
At Recovery Solutions Group (RSG), we are happy to review your facility and give you a free estimate of the benefit that will provide you with the estimated first year cash flow increase, 10-year net present value and the study completion fee. RSG stands behind all of its work with free audit defense.
Reach Gabriel at Gabe@recoverysoultionsgroup.net or 843-353-2736 (Of), 843-270-7976 (M).