Data Center

Learn How a Modular Data Center May Lower Your Tax Bill

Regular readers of this blog know we’ve covered many times the benefits of modular, scalable data center infrastructure, including speed of deployment, ease of scalability and lower overall costs. Now we can add another benefit to the list: lower taxes.

That’s the gist of a free course now being offered at Schneider Electric’s Energy University titled “Financial Planning for Physical Infrastructure Assets in US Data Centers.”  The course gives data center owners and operators the background required to have fruitful conversations with their accounting teams to determine how best to account for new data center infrastructure, and potentially save money in the process.

The advent of scalable, modular UPS systems, power distribution systems and, in some cases, air conditioning systems has given rise to a new physical infrastructure asset management opportunity. In many cases, for accounting purposes companies can treat these modular systems as “business equipment,” rather than as part of the building in which the equipment is installed. This new classification is the direct result of scalable, modular and factory tested systems that require little or no field wiring other than the power connection.

As the course details, due to the complexity involved in the field installation of legacy UPS and PDU systems, they were typically classified as either a “building improvement” or “leasehold improvement.” What’s more, it’s often difficult to financially determine where the UPS system ends and where building components such as transformers and switchgear begin. Consequently, the legacy UPS system becomes merged with the rest of the building’s electrical systems, even though it has a substantially shorter useful life, and is declared part of the construction job and then as part of the “real estate.”  That means the systems are also subject to permits, inspection delays and inspection fees.

Modular, scalable UPSs and PDUs, on the other hand, are self-contained units. They can be booked and depreciated as business equipment, and taxed as “personal property,” much like a freestanding refrigerator or desktop computer. They also don’t require permit or inspection fees for the factory built portion, enabling shorter depreciation schedules. A life expectancy can be assigned to the equipment, which may be substantially different than the lives assigned to more permanent “bricks and mortar” assets.

As you’ll learn in the course, this distinction comes with clear tax implications. All non tax-exempt organizations are required to pay real estate taxes, personal property taxes, and income taxes. (Renters may not directly pay real estate taxes, but real estate taxes are a definite part of the rental or lease payment.) Assets that are either used to house or operate a business are known as either “real property” or “personal property” and are taxed accordingly.

The ability to tax modular systems as personal property can bring distinct benefits and increase an organization’s financial flexibility by enabling it to apply different depreciation rates to different components.  That can lower corporate income taxes and make available more cash flow.

The integration of this physical infrastructure into an organization’s economic model is not difficult, because nearly all organizations have experience with the management of business equipment, such as computers, copy machines, production machinery and company owned vehicles. The trick is enlightening your financial team to the attributes of new modular systems, so they understand that they can be treated as personal property for tax purposes.

The free course, “Financial Planning for Physical Infrastructure Assets in US Data Centers,” lays out a 7-step asset management strategy that will ensure all of your assets are properly accounted for.  Check it out and make sure you’re getting all the tax benefits you’ve got coming to you. You’ll find the course in the College of Data Centers at Energy University.

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