By Jerry Jones
The new year is an ideal time for self-storage owners to review their current tax and financial situation and capitalize on opportunities that may help them save money. This article offers tax-savings tips to help you reduce your liability as well as new regulations specific to the self-storage industry.
General Business and Personal Taxes
When it comes to taxes, your goal is to save money by capitalizing on deductions that are in line with your business and personal financial situation. Consider the following:
Bunch-itemized deductions. Many deductions, such as medical, are only available if they exceed 10 percent of your adjusted gross income. Keep this in mind throughout the year. Consider prepaying items whenever possible.
Retirement-savings accounts. Leverage these by deducting now and paying taxes later.
Roth rollover. If your income dropped last year, consider converting your regular IRA to a Roth IRA. You’ll pay taxes at a lower rate. If you lost money in a Roth account, reverse the conversion before the end of the year and then fund it next year, thereby decreasing your tax liability.
Home-office deduction. An optional safe-harbor method to calculate a deduction for expenses of a home office became available in 2013. You can deduct up to $5 per square foot, up to $1,500 per year. It’s not necessary to keep track of exact expenses.
Maximize above-the-line deductions. Common deductions for “above the line” are traditional IRAs and other pension plans, health-savings account contributions, moving expenses, self-employed health-insurance costs, and alimony payments.
Mileage deductions. This is a common deduction. Just remember to keep track of your mileage and where and why you went somewhere. It’s a lot easier to do this now rather than answering to an auditor from the Internal Revenue Service (IRS) down the road.
Gift-tax exclusion. You can give up to $14,000 to as many people as you wish free of gift and estate taxes. If you combine gifts with your spouse, you can give up to $28,000 per beneficiary per year.
New capitalization regulations. In 2014, the IRS issued long-awaited regulations that provide guidance on the application of code sections 162(a) and 263(a) to amounts paid to acquire, produce or improve tangible property. These new regulations will affect virtually all taxpayers who acquire, produce or improve tangible property.
Annual checkup. Assess your current financial position and plan for the future. Along with the help of your financial planner, attorney and accountant, discuss your plans for health-care expenses, retirement, investment and estate planning. Update your wills, trusts, powers of attorney and health-care proxies.
Here are a few tax issues and regulations specific to the self-storage industry.
American With Disabilities Act. Under the new regulations, 5 percent of the first 200 storage units must be wheelchair accessible, followed by 2 percent of the units thereafter. Any person who’s denied access can file a lawsuit under Title 3.
Schedule E vs. Schedule C. Bad news here. It seems “tax preparers” across the country are treating self-storage income as a “business” and putting it on a Schedule C, treating it as ordinary income. By doing this, your income will be subject to self-employment taxes that could reach $15,000 or more per year.
This is totally wrong. Self-storage income should be considered “rental property” and be put on a Schedule E or treated as rental property in an LLC, therefore, not subject to self-employment taxes. Check your tax returns and see if your preparer has been placing your income on a Schedule C or showing it as business income on your LLC return. If so, you should look into amending your tax return.
Small-business health-care tax credit. There are several changes here. First, there’s an increase to 50 percent for premiums paid for by small-business owners. They also must pay premiums on behalf of employees enrolled in a qualified health plan. Finally, credit is available for two consecutive years of enrollment. Remember, you can also carry back or forward the credit. If you forgot to claim it on your tax return, you can still amend it.
Section 179. This allows a taxpayer to deduct the cost of certain types of property on his income taxes as an expense, rather than requiring the cost of the property to be capitalized and depreciated. Note: You can’t take a Section 179 deduction on your Schedule E.
Tax laws change every year, so confer with your accountant and attorney on ways to get the most from the available deductions. Start the year by examining your past tax bills and consider what changes you can make to save a few dollars this year.
Jerry Jones is a certified public accountant who has worked closely with self-storage owners, operators and managers for more than 25 years to ensure proper accounting/tax procedures are being addressed. He can prepare tax returns for operators nationwide. For more information, visit www.theselfstoragecpa.com.