Prefab data center modules: Accounting and tax benefits
Accounting and Tax Benefits of Modular, Portable Data Center Infrastructure
White Paper 115 Summary Revision 1 By Barry Rimler
This white paper is provided to highlight the opportunities and benefits of involving a finance or tax professional who is knowledgeable in the acquisition and deployment of data center physical infrastructure assets. By applying the accounting options available within the framework of what is known as Generally Accepted Accounting Principles (GAAP), data center assets may be better aligned with the goals and objectives of a particular business, institution, or organization. This document is not intended to provide or offer advice on tax planning, as only a qualified or certified financial professionals may actually provide tax advice.
Among the difficulties faced by owners of power and cooling assets, is the absence of perceptive financial treatment of the individual portions of mission critical systems. Frequently, the UPS, power distribution unit (PDU), and branch circuit panels installed in the construction of a building (or as a major improvement project) will be booked as a building improvement and depreciated along with the concrete, steel, boilers and pipes of the building. The building will likely have a long depreciable life, which may be upwards of 30+ years. However, power & cooling equipment typically has a relatively short useful life, even though the UPS, PDU, and related branch circuits may remain on the books long after they are declared obsolete. For many companies, improper booking of high technology systems such as UPS systems and PDUs routinely causes substantial problems in the form of overstated real property asset value, and the obligation to take a write-down in the year that the UPS and related parts are retired.
Recent improvements in the design and manufacture of power & cooling equipment, particularly UPS systems, PDUs, and (to some extent) air conditioning, has opened up the opportunity to treat them as business equipment, rather than a part of the building in which the equipment is installed. This achievement is the direct result of scalable, modular, and fully manufactured systems requiring little or no field wiring other than the connection of the input power (see figure).
Traditional vs. factory-built solutions
A traditional UPS system (consisting of a UPS module, battery cabinet, and various out-board switches) is more than likely installed as a part of the building’s electrical system, and booked as a building improvement, in the case of an owner occupied property, or as a leasehold improvement in property secured under a lease.
While it is possible to apply different depreciation schedules to the UPS batteries, doing the same for the UPS system isn’t as simple, since it is difficult to financially determine where the UPS system ends and where building components such as transformers and switchgear begin. Consequently, the traditional UPS system becomes merged with the rest of the building’s electrical systems, even though it has a substantially shorter useful life.
Factory built UPS systems ship with factory wired PDUs, in which the branch circuit distribution is fully developed and furnished. This type of system saves exceptional amounts of field installation time, particularly if the entire system is part of a cord and plug connected solution. Such systems can be booked and depreciated as business equipment, and taxed as “personal property”, (like a free-standing refrigerator or desktop computer) without permit or inspection fees for the factory built portion. This enables shorter depreciation schedules. This distinction may be useful to certain clients that see a benefit in separating higher technology assets from the real estate or "base building", and assigning a unique "life" to their business equipment, which may be substantially different than the lives assigned to long-life assets such as "bricks and mortar", chillers, pumps, and boilers.
Financial planning for physical infrastructure assets
While power and cooling assets are frequently purchased at the request of an IT professional or a facilities manager, often the “life of the new asset” fails to get linked to a business, institution, or organization’s practices for the “booking of assets”, despite having individuals who are well versed in accounting principles and tax issues. Without direct guidance, the assets generally get booked to the realty or placed as a leasehold improvement, which is the traditional way to book and depreciate power and cooling infrastructure. This may be a costly mistake.
Modular factory built solutions in the hands of a resourceful alliance of IT, facilities, and financial personnel can make a substantial impact on data center reliability and a welcome contribution to the asset management and tax efficiency of their business, organization or institution. The booking of assets is usually a one-time opportunity to plan the financial and accounting future of newly acquired equipment. Accurate assessment of the life of power and cooling equipment reduces the chance of expensive “write-downs” later.
Whether practiced by asset managers, IT professionals, or facility managers, asset management practices used by many businesses were developed and documented many years before the advent of modular, scalable factory-built UPS systems, PDUs and related equipment. During that period of time, all power and cooling equipment was considered as “fixed in place” or “building equipment”. The “fixed in place” designation limits the equipment to treatment as building improvement in the case of owned property, and a leasehold improvement in the case of a rental. In either case the opportunity is missed, to account for UPS systems, PDUs and related equipment as “business equipment” that is managed as personal property.
Modular, scalable, factory-built solutions provide for “asset reuse and portability”. This provides IT professionals and facility managers the ability to deploy and redeploy infrastructure in response to changes in business or upon the conclusion of a lease, reducing the cost of abandonment in place, or the necessity to write down a “stranded asset”, or cause the asset to inure to a landlord as a leasehold improvement. This benefit is realized by facility managers or asset managers who develop “rent-rates”, benchmark their facilities against the facilities of other companies, and plan capital improvement. IT departments receive the direct benefit, because real estate taxes and depreciation are a large part of rents applied to IT space, collectively only second to energy costs.
Implementation of an asset management strategy
The key to successful implementation of a tax and tax related asset management strategy is involving a financial professional along with the IT professionals, and facility managers involved in the deployment of power and cooling infrastructure, and:
1. Consider treating all factory-built solutions as business equipment
2. Consider declaring factory built infrastructure as personal rather than real property
3. Create realistic depreciation schedules
4. Avoid life cycle errors creating stranded asset requiring a “write-down” against earnings
5. Reassess permit and inspection requirements for factory built power and cooling
6. Plan for asset portability and asset reassignment; and incorporate tax related savings
7. Plan for reduction in construction costs for a dedicated UPS room
8. Lower monthly or annual rents or allocation cost associated with dedicated UPS rooms, hallways, and common areas required to access the dedicated UPS rooms
Modular, scalable UPS systems, PDUs, and computer room air conditioners have not only created technological benefits, but provide entirely new tax and asset management opportunities with direct and measurable financial benefits. While this white paper is intended to highlight these opportunities, its primary message is the benefit of involving a tax professional in any team planning improvement to a data center or network room infrastructure. The results will be dramatic.
For more information on this topic including a detailed step by step asset management strategy, please download White Paper 115, Accounting and Tax Benefits of Modular, Portable Data Center Infrastructure.