What expense category is Storage?

Whether it's finding space for inventory, archiving important documents, keeping equipment safe, or managing digital data, storage is a common necessity for many businesses. The costs associated with this storage—be it renting a physical space or paying for cloud services—are business expenditures that need correct classification for accurate bookkeeping and tax reporting.

Accountants and SMB owners need to understand how to categorize different types of storage costs, as the treatment can vary significantly depending on what is being stored and the nature of the expense.

Storage Expense Category

The appropriate expense category for storage costs depends heavily on the purpose of the storage:

1. Storage for Inventory

• Costs associated with storing goods held for sale (inventory) are often considered part of the Cost of Goods Sold (COGS).
• Under the IRS Uniform Capitalization Rules (UCR), businesses involved in production or resale may be required to capitalize storage costs (like warehouse rent, depreciation on storage facilities) into the value of their inventory. These costs are then recovered through COGS when the inventory is sold.
• Important Exception: Small business taxpayers (generally, those with average annual gross receipts of $30 million or less for the prior 3 years, as per Pub 334 based on the threshold in the provided Pub 535 ) are often exempt from the complex UCR requirements. They may be able to include inventory storage costs more directly in COGS calculations or treat them as current expenses without capitalizing them into inventory value.

2. Storage for Equipment, Documents, or General Business Use (Non-Inventory)

• Rent paid for physical space like a self-storage unit or a warehouse section not used for inventory subject to UCR is typically classified as Rent Expense (specifically, rent for "Other business property").
• Alternatively, a specific Storage Expense category can be used.

3. Digital / Cloud Storage

Fees paid for online data storage (e.g., Google Drive, Dropbox, AWS S3, Microsoft Azure) are usually classified under IT Expenses, Software Subscriptions, or sometimes Dues and Subscriptions.

Some Important Considerations While Classifying Storage Expenses

When dealing with storage costs, consider the following:

• Inventory vs. Non-Inventory Storage: This is the most critical distinction for physical storage due to potential COGS and UCR implications versus straightforward Rent Expense treatment. Determine if your business is subject to UCR based on its size and activities.
• Ordinary and Necessary: The storage cost must be an ordinary (common and accepted) and necessary (helpful and appropriate) expense for your business operations.
• Business Use of Home for Storage: If you store inventory or product samples in your home, you can only deduct associated home expenses if you meet strict IRS requirements (e.g., space used exclusively and regularly for storage, home is the sole fixed location of the business). Renting external storage avoids these complexities.
• Prepayment Rules: If you prepay rent for a storage unit or fees for cloud storage significantly in advance (e.g., paying for multiple years upfront), you generally must allocate the cost and deduct it over the period the payment covers, rather than deducting it all in the year paid.
• Recordkeeping: Maintain detailed records, including rental agreements or leases for physical space, invoices from storage facilities or cloud service providers, and proof of payment.

Examples of Storage Expenses

Businesses may incur various types of storage costs:

• Physical Storage:
  
  • Monthly rent for warehouse space used for inventory or equipment.
  • Rent for a self-storage unit for business records, tools, or seasonal items.
  • Fees paid to a professional off-site document archiving service.
• Digital Storage:
  
  • Subscription fees for cloud storage services (Dropbox Business, Google Workspace/Drive, Microsoft OneDrive for Business, Box, etc.).
  • Fees for data storage on cloud computing platforms (Amazon Web Services S3, Microsoft Azure Blob Storage, Google Cloud Storage).
  • Costs for data backup and recovery services that include storage.

Tax Implications of Storage Expenses

The tax treatment depends on the type and purpose of the storage:

Deductibility

• Inventory Storage: Costs are recoverable, usually as part of COGS when the inventory is sold. Businesses exempt from UCR might deduct these costs more directly.
• Rent for Non-Inventory Storage: Deductible as Rent Expense.
• Digital/Cloud Storage Fees: Deductible as an operating expense (e.g., IT, Subscription, or Other Expense).

Timing of Deduction

• Costs included in COGS are deducted in the year the goods are sold.
• Rent and subscription fees are deducted in the year they apply, according to your accounting method (Cash or Accrual) and prepayment rules.

Uniform Capitalization Rules (UCR)

If applicable, UCR requires certain direct and indirect costs, including storage related to inventory, to be capitalized rather than immediately expensed. Remember the small business taxpayer exception.   

Where to Report (Schedule C)

For sole proprietors:

• Storage costs included in COGS are factored into the calculation in Part III.
• Rent paid for storage units/facilities (non-inventory) goes on Line 20b ("Rent or lease: Other business property").
• Digital storage fees, document storage services, etc., typically go on Line 27a ("Other expenses"), specifying the type (e.g., "Cloud Storage," "Data Backup Services").

How Fyle Can Automate Expense Management

Managing various storage costs, especially recurring digital subscriptions or rental payments, requires good tracking. Fyle can help:

• Capture Payments: Track payments for cloud storage subscriptions or physical storage rent made via company credit card using Fyle's real-time feeds. Attach invoices or proof of payment for expenses paid via other methods.
• Centralize Documents: Store lease agreements for storage units, invoices from cloud providers, and digital payment receipts within Fyle linked to the specific expense record.
• Consistent Categorization: Ensure costs are consistently assigned to the correct category (e.g., Rent Expense, IT Subscriptions, COGS-related) using Fyle's tools.
• Track Recurring Fees: Monitor monthly or annual payments for storage rentals or cloud services to help with budgeting and ensure timely payment.
• Seamless Integration: Fyle syncs the categorized expense data directly into your accounting software (QuickBooks, Xero, NetSuite, Sage Intacct), ensuring your financial records accurately reflect these storage costs.

Storage costs are a common business necessity, but their accounting and tax treatment varies. The key is to identify whether the storage relates to inventory (potentially impacting COGS and involving UCR) or other business needs (usually Rent or another operating expense), and whether it's physical or digital. 

Proper classification, consistent application, and solid recordkeeping, supported by tools like Fyle, ensure these expenses are handled correctly.