Cost segregation for self-storage businesses

Posted by Aaron Rodgers on November 12th, 2020

Dealing with business taxes can be tiring but with a proper tax strategy, the results can be rewarding. Here is how cost segregation helps you reduce your current tax liability and increase the cash flow.

The tax seasons have always been challenging one for taxpayers and it is the same for self-storage owners as well. Are you shocked looking at the numbers in your tax bill? Are you seeking help from your CPA? The US tax code is one of the most complex ones and you cannot expect your CPA to know the nuances of the tax codes. Many are not aware of the tax strategy - cost segregation and how it could help in saving hundreds and thousands of dollars.

Understanding the tax rate

Do you know how income taxes are calculated? Have you ever thought about how the numbers on your bill have arrived?  Here is how it's done. Total tax + State tax if applicable dived by your gross income. The resulting number is then multiplied by 100 and that is your federal tax rate. 

Identifying the right depreciation method

As you know depreciation is the reduction in the value of an asset as a result of wear and tear over the years. According to the IRS, self-storage has a useful period of 39 years. When you op for a straight-line depreciation your entire building is depreciated over a 39 year period but cost segregation is quite different. Let's take a closer look at it now.

Understanding cost segregation

You may be familiar with the word cost segregation but did you know by taking the fullest advantage you could be eligible for valuable savings. A cost segregation study identifies and reclassifies assets to a shorter depreciation time. Instead of treating the entire building as one asset, a cost segregation study identifies each component of a building for tax purposes. This helps in depreciating assets over their useful life instead of taking the purchase price as a whole. Assets are usually classified as 39, 15, and 5-year properties depending on the IRS guidelines on their actual useful life.

Cost segregation helps in additional cash flow for repairs and improvements and this is indeed helpful for self-storage businesses. 

Benefits of cost segregation

• Increases cash flow

• Reduces current tax liability

• Identifies the major components of a property and the improvements so that it can be written off when replaced or renovated

Taxes are overwhelming, but a proper cost segregation study is worth the effort. Find a cost segregation specialist who has conducted cost segregation studies for self-storage businesses. Don’t pay more than you ought to.