With the self-storage operation’s 2021 taxes finished or postponed until later, it’s time to think about the new ballgame that is the 2022 tax bill. The controversial Build Better Act bill may or may not emerge in whole or in part to foil any planned tax savings, but far more certain are the many existing tax breaks and changes already in place for 2022.
Past And Present:
Many of the potential tax savings—and currently misunderstood or neglected law provisions—were already on the books. Consider the following:
PAYROLL TAX DEFERMENT: The Coronavirus Aid, Relief, and Economic Security (CARES) Act allowed employers to defer deposits and payments of their share of Social Security taxes from March 27 through Dec. 31, 2020. While 50 percent of those deferred amounts was required to be deposited by Dec. 31, 2021, any remaining amount must be deposited by Jan. 3, 2023.
GOING THE EXTRA MILE: The standard mileage rate used by so many self-storage owners, operators, managers, investors, developers, and builders has been increased for the 2022 tax year. Reflecting the higher price at the pumps, for 2022 the rate for vehicles, including passenger automobiles, vans, pickups, and panel trucks, is 58.5 cents per mile when used for business purposes. Plus, of course, any related tolls and parking fees to these amounts.
INDEPENDENT CONTRACTORS: The controversy over who is and isn’t an independent contractor continues in 2022. Under our federal tax law, independent contractors are self-employed individuals who are responsible for their own tax filings and payments.
Making it easier for the IRS to track those using or claiming independent contractor status a new form, Form 1099-NEC, Nonemployee Compensation, will, presumably, allow the IRS to better target misuse of independent contractor status.
Now is the time to ensure the independent contractors used by the self-storage facility or business and those trades people, builders, and professionals calling themselves independent contractors really are. Fortunately, the IRS has a form, Form SS-8, that either workers or an employer can fill out to obtain an IRS determination on worker status.
SIGN-ON BONUSES TO ATTRACT NEEDED WORKERS: The self-storage industry has not been immune to today’s labor shortages. So-called “signing bonuses,” just like those we’re familiar with in professional sports, are becoming more and more common. A signing bonus is money a self-storage business gives an employee who has accepted their job offer.
When paying a signing bonus, or any bonus this year, remember that there are different rules. A signing bonus paid to a new employee that is contingent (no longer refundable) on a certain minimum amount of time of employment will likely be classified as a prepaid salary, a current asset. Once that time is reached, the bonus would then be reclassified as an expense.
From a payroll tax angle, when the self-storage operation pays a signing bonus, or any bonus, they are considered so-called “supplemental” income and require a higher withholding rate. Bonuses are not considered deductible expenses for sole proprietorships, partnerships, or limited liability companies (LLCs) because the owners/partners/members are considered to be self-employed.
Writing It Off
It’s often a waste for any unprofitable business to claim accelerated or so-called “bonus” depreciation. What are they going to deduct those write-offs from? However, where there are profits, deductions can ensure tax savings, and now might be the time to look at cost segregation.
Every business or individual that acquires so-called “nonresidential real property” has an opportunity to reduce the depreciable lives of the building’s components. That’s right, certain assets may qualify for shorter lives and recovery periods which, in turn, provide accelerated deductions to offset income.
That means parking lots, sidewalks, curbs, fences, landscaping, signage, lighting, security, fire fighting systems, and more might qualify for a shorter life as building “components.” Although a cost segregation study should be completed before a building is placed in service, it can be completed after construction or the time of purchase.
The Way We Do Business
Many self-storage owners, operators, developers, builders, and industry professionals recently discovered, or will discover should they face an IRS audit, that even seemingly common business deductions can have a dark side. Among the restrictions that should be considered in the months ahead are such things as:
LIKE-KIND EXCHANGES: Generally, a like-kind or “1031” exchange is a swap of one property or piece of equipment for another. The capital gain tax is avoided since the exchanged asset is rolled over unless or until the property is retired, disposed of, sold, transferred, or rolled over yet again.
Taxes under a like-kind exchange are deferred, not eliminated. But, a like-kind exchange allows the seller to defer their depreciation recapture—sometimes. After all, special rules apply when depreciable property is exchanged. If not properly structured, and the properties involved don’t qualify as “like-kind” under the tax rules, the transaction can trigger a profit known as “depreciation recapture,” which is taxed as ordinary income.
Beware too, lawmakers and the White House have proposed, but not yet passed, limiting like-kind exchange deferral amounts. One factor in those proposed plans would allow these tax-free swaps but exclude some personal and intangible property.
Whether innocently or otherwise, many self-storage owners, operators, developers, and builders have overlooked some of their operation’s reportable income. Today, as a reminder or check, the IRS has new reporting requirements including:
DIGITAL ASSET REPORTING: It is not only so-called “brokers,” that is “any person who is (for consideration) responsible for regularly providing any service effectuating transfers of digital assets on behalf of another person,” impacted by 2021’s Infrastructure Investment and Jobs Act (IIJA).
Everyone in the self-storage industry accepting or using cryptocurrency will be affected by these requirements. The 2021 IIJA included reporting requirements for virtual currency and other digital assets impacting every trade or business that receives more than $10,000 in digital assets.
Although effective applying only to digital assets acquired on or after Jan. 1, 2023, impacted businesses are obviously going to need significant lead time in order to comply with these new reporting requirements.
Although not effective in 2022, these provisions are the first compliance requirement for “digital assets,” and an indicator that the IRS will soon target the crypto and non-fungible token markets for enforcement.
THIRD-PARTY PAYMENT PROVIDERS: Any self-storage business receiving payment through PayPal, Venmo, Zelle, CashApp, or any third-party settlement provider (TPSP), will soon discover that it is being reported to the IRS. TPSPs have always had to file information returns with the IRS to report some payments to payees. However, before 2020, the information reporting requirement did not apply until the TPSP made more than 200 payments to the payee totaling more than $2,000 during the year.
Not All Income Is Equal
Much has been written and said about the special treatment of income from so-called “pass-through entities” such as partnerships, S corporations, etc. Understanding how the operation’s business entity is labeled is important. Take into consideration:
QUALIFIED BUSINESS INCOME: The Qualified Business Income (QBI) deduction allows the owner of a self-storage business who make less than $64,900 during the 2022 tax year to claim up to a 20 percent deduction from their taxable business income. In general, total taxable income this year must be under $170,000 for single filers and $340,000 for joint filers. Over that limit, complicated rules determine whether the business income qualifies for a full or partial deduction.
ANOTHER WAY OF DOING BUSINESS: Every owner of a small self-storage facility or business that has outgrown their current business structure has several options for structuring the business. They can operate as a sole proprietor, partnership, limited liability company (LLC), or S corporation, and (hopefully) benefit from the 20 percent deduction for Qualified Business Income (QBI). Or they can incorporate as a regular “C” corporation.
The structure of the self-storage business will obviously impact how taxes will be filed. Changing the business structure used to be rare, as the top corporate tax rate was 35 percent. However, the Tax Cuts and Jobs Act (TCJA) of 2017 dropped the top corporate rate to only 21 percent. While Congress has proposed an increase in the corporate tax rate to 26.5 percent, the tax bills of many self-storage businesses, and their owners, might benefit from an entity change, especially those with pass-through businesses.
Changing business entities will help reduce risk exposure, help the operation attract investors, or lower the self-storage operation’s tax bill. Naturally, the IRS will require adjustments in income and deductions to ensure they won’t lose revenue as a result of the switch. In general, entity switches must occur within the first few months of a tax year, although there are numerous exceptions.
Our tax laws may change, and the IRS impose new rules and/or limit write-offs. However, one thing that will never change is the importance of tax planning. Substantial tax savings are possible with planning—not only at year’s end but over the course of the year as the self-storage business operates.