Artificial intelligence is driving an unprecedented surge in data center construction. Developers, private equity sponsors and their tax advisors are navigating a complicated web of questions that touch everything from ownership structure to site selection to power sourcing. Get the early decisions wrong and the tax consequences can follow a project for years.
Why REITs Have Become the Structure of Choice
Private equity has increasingly turned to real estate investment trusts when backing data center projects. Structure a REIT correctly, and you sidestep corporate-level taxation entirely. Foreign investors get an even better deal. Sovereign wealth funds and foreign pension funds can participate without any obligation to file U.S. tax returns. Data centers, with their heavy real estate footprint, slot into the REIT framework more naturally than many other asset classes.
That said, the fit is not seamless. Related party rent rules create traps for the unwary. Public pension funds and sovereign wealth funds need to confirm they do not hold stakes in both a data center REIT and its tenant. Another wrinkle involves equipment. Data centers demand significant upfront investment in personal property that may not count as qualifying REIT assets. The tax code requires that 75 percent of a REIT’s total asset value consist of real estate, cash, and government securities at each quarter’s close. Developers often must segregate personal property until the REIT builds up enough good assets to clear that hurdle.
The Power and Water Challenge
Reliable power and water access have become one of the toughest operational problems in the industry. Demand is so intense that many developers are generating their own electricity on-site. The tax treatment of these co-located power facilities depends heavily on the energy source and delivery method. Get it wrong, and the generation asset may not qualify for REIT treatment.
Solar photovoltaic systems sit on relatively solid ground under existing guidance. Nuclear and natural gas, which many see as the next wave of data center power, do not. Current rules leave significant uncertainty around whether these sources can work within a REIT structure.
Legislative and Executive Developments
The IRS priority guidance plan for 2025 and 2026 contains no projects aimed squarely at data centers. Regulation section 1.856-10(g), finalized in 2016, includes an example analyzing customized electrical and telecommunications systems in a data center context, but practitioners continue pushing for clearer rules on alternative energy.
Congress may offer relief on the waterfront. In April 2025, Representative Darin LaHood of Illinois proposed a new section 48F that would provide a 30 percent credit for qualifying water reuse projects, including on-site recycling systems at data centers. With U.S. data centers projected to consume 33 billion gallons of water by 2028, the bill attracted 21 cosponsors and bipartisan support.
The White House has made its priorities clear as well. The Trump administration’s July 2025 AI action plan established a goal of achieving global dominance in artificial intelligence, with infrastructure as one of three pillars. An executive order, issued July 23, 2025, focused specifically on reducing federal regulatory obstacles to data center construction.
Conclusion and OBBBA Incentives Worth Watching
Several provisions in the One Big Beautiful Bill Act benefit data center projects, even though lawmakers did not design them with that sector in mind. The return of 100 percent bonus depreciation under section 168(k) matters enormously for an industry requiring massive capital outlays.
Rural Opportunity Zones sweeten the economics further. Investments in qualified rural opportunity funds now qualify for a 30 percent basis step-up after five years, triple the 10 percent available in standard zones. A special rule targeting improvements to existing structures in rural areas cuts the substantial improvement threshold to 50 percent of adjusted basis, compared to more than 100 percent for non-rural funds.
Developers and investors evaluating new projects will find that entity structure, site selection, and the shifting regulatory environment all interact in ways that directly affect the bottom line. Getting the tax picture right from the start remains essential.
Alan F Burke CPA
Tax Considerations for Data Center Projects in the Age of AI
May 1, 2026 · Blog, Tax and Financial News
⏱ 4 min read
Artificial intelligence is driving an unprecedented surge in data center construction. Developers, private equity sponsors and their tax advisors are navigating a complicated web of questions that touch everything from ownership structure to site selection to power sourcing. Get the early decisions wrong and the tax consequences can follow a project for years.
Why REITs Have Become the Structure of Choice
Private equity has increasingly turned to real estate investment trusts when backing data center projects. Structure a REIT correctly, and you sidestep corporate-level taxation entirely. Foreign investors get an even better deal. Sovereign wealth funds and foreign pension funds can participate without any obligation to file U.S. tax returns. Data centers, with their heavy real estate footprint, slot into the REIT framework more naturally than many other asset classes.
That said, the fit is not seamless. Related party rent rules create traps for the unwary. Public pension funds and sovereign wealth funds need to confirm they do not hold stakes in both a data center REIT and its tenant. Another wrinkle involves equipment. Data centers demand significant upfront investment in personal property that may not count as qualifying REIT assets. The tax code requires that 75 percent of a REIT’s total asset value consist of real estate, cash, and government securities at each quarter’s close. Developers often must segregate personal property until the REIT builds up enough good assets to clear that hurdle.
The Power and Water Challenge
Reliable power and water access have become one of the toughest operational problems in the industry. Demand is so intense that many developers are generating their own electricity on-site. The tax treatment of these co-located power facilities depends heavily on the energy source and delivery method. Get it wrong, and the generation asset may not qualify for REIT treatment.
Solar photovoltaic systems sit on relatively solid ground under existing guidance. Nuclear and natural gas, which many see as the next wave of data center power, do not. Current rules leave significant uncertainty around whether these sources can work within a REIT structure.
Legislative and Executive Developments
The IRS priority guidance plan for 2025 and 2026 contains no projects aimed squarely at data centers. Regulation section 1.856-10(g), finalized in 2016, includes an example analyzing customized electrical and telecommunications systems in a data center context, but practitioners continue pushing for clearer rules on alternative energy.
Congress may offer relief on the waterfront. In April 2025, Representative Darin LaHood of Illinois proposed a new section 48F that would provide a 30 percent credit for qualifying water reuse projects, including on-site recycling systems at data centers. With U.S. data centers projected to consume 33 billion gallons of water by 2028, the bill attracted 21 cosponsors and bipartisan support.
The White House has made its priorities clear as well. The Trump administration’s July 2025 AI action plan established a goal of achieving global dominance in artificial intelligence, with infrastructure as one of three pillars. An executive order, issued July 23, 2025, focused specifically on reducing federal regulatory obstacles to data center construction.
Conclusion and OBBBA Incentives Worth Watching
Several provisions in the One Big Beautiful Bill Act benefit data center projects, even though lawmakers did not design them with that sector in mind. The return of 100 percent bonus depreciation under section 168(k) matters enormously for an industry requiring massive capital outlays.
Rural Opportunity Zones sweeten the economics further. Investments in qualified rural opportunity funds now qualify for a 30 percent basis step-up after five years, triple the 10 percent available in standard zones. A special rule targeting improvements to existing structures in rural areas cuts the substantial improvement threshold to 50 percent of adjusted basis, compared to more than 100 percent for non-rural funds.
Developers and investors evaluating new projects will find that entity structure, site selection, and the shifting regulatory environment all interact in ways that directly affect the bottom line. Getting the tax picture right from the start remains essential.
Disclaimer
These articles provide general information on tax, accounting, and financial topics for small businesses and individuals. They are educational in nature and are not specific legal, accounting, financial, tax, or other professional advice, and should not be relied upon as such. This content was prepared by Service2Client and may have been reviewed or edited by the website owner for accuracy and compliance. Look for a trust mark below for verification details. No representation is made that any approach described will achieve a particular result, and no regulatory or professional body has reviewed or endorsed this content. Because each situation is different, readers should consult a qualified professional about their specific circumstances before acting. Images accompanying these articles are protected by copyright and may not be copied or reused.
When it comes to making an informed investment decision, one way is to use the benefit-cost ratio (BCR).
Benefit-Cost Ratio Defined
The BCR calculates how profitable a project’s (or an asset’s) cash flows are via a present value cash flow analysis. It takes the value of all incoming cash flows and weighs it against the same project’s or asset’s outgoing cash flows. If the calculation results in a BCR higher than 1, then more than likely that asset and/or project will provide a positive outcome.
How the Benefit-Cost Ratio is Calculated
= ((Moneys received / 1 + discount rate) ^ Cash flow time frames)) / ((Moneys expended / 1 + discount rate) ^ Cash flow time frames))
Money received can also be referred to as the cash flows’ benefits. Money expended is also referred to as cash flow. This formula essentially divides the discounted cash flows by the discounted cash outflows. It’s important to mention that the discount rate can also be referred to as the business’s or investor’s required return.
The following is an example of the different levels of cash flows:
Start
1 Year Later
2 Years Later
3 Years Later
Outflows
-$8,000
-$16,000
-$20,000
-$27,500
In-Flows
—
—
$80,000
$120,000
Net Cash Flow
-$8,000
-$16,000
$60,000
$92,500
Based on the calculations, the following illustrates the results for both Discounted Costs and Discounted Benefits:
Time Frame
Discounted Costs
Discounted Benefits
Start
$8,000
0
After 1 Year
-$16,000 / (1 + 10 percent)1 = $14,545.45
0
After 2 Years
-$20,000 / (1 + 10 percent)2 = $16,528.93
$80,000 / (1 + 10 percent)2 = $66,115.70
After 3 Years
-$27,500 / (1 + 10 percent)3 = $20,661.16
$92,500 / (1 + 10 percent)3 = $69,496.62
The final calculation sums up the Discounted Benefits and the Discounted Costs and then divides them, resulting in:
$135,612.32 / $59,735.54 = 2.27
Analyzing the Results
The resulting figure means that $2.27 is expected to be generated per $1 invested. It can be used by both internal stakeholders and potential external investors to gauge if the asset or project is worth the risk.
If the BCR came back at less than 1, it would indicate an Internal Rate of Return (IRR) that is lower than the discount rate. This reading would also show that the net present value of the project or asset is projected to be negative.
If the BCR is 1, this essentially means the net pre-set value is zero. The IRR would be equal to the discount rate.
If, however, the BCR is more than 1 – as in the example above – it means the IRR is higher than the discount rate, and the net present value is more than zero.
It’s important to consider that these are only assumptions. If, for example, the cash flow forecasting is incorrect or the discount rate is off, the ratio can provide wide variances.
Conclusion
Whether it’s an internal stakeholder or a potential investor, this ratio can and should be used as part of a holistic financial analysis program.
Alan F Burke CPA
Understanding the Benefit-Cost Ratio (BCR)
May 1, 2026 · Accounting News, Blog
⏱ 3 min read
When it comes to making an informed investment decision, one way is to use the benefit-cost ratio (BCR).
Benefit-Cost Ratio Defined
The BCR calculates how profitable a project’s (or an asset’s) cash flows are via a present value cash flow analysis. It takes the value of all incoming cash flows and weighs it against the same project’s or asset’s outgoing cash flows. If the calculation results in a BCR higher than 1, then more than likely that asset and/or project will provide a positive outcome.
How the Benefit-Cost Ratio is Calculated
= ((Moneys received / 1 + discount rate) ^ Cash flow time frames)) / ((Moneys expended / 1 + discount rate) ^ Cash flow time frames))
Money received can also be referred to as the cash flows’ benefits. Money expended is also referred to as cash flow. This formula essentially divides the discounted cash flows by the discounted cash outflows. It’s important to mention that the discount rate can also be referred to as the business’s or investor’s required return.
The following is an example of the different levels of cash flows:
Start
1 Year Later
2 Years Later
3 Years Later
Outflows
-$8,000
-$16,000
-$20,000
-$27,500
In-Flows
—
—
$80,000
$120,000
Net Cash Flow
-$8,000
-$16,000
$60,000
$92,500
Based on the calculations, the following illustrates the results for both Discounted Costs and Discounted Benefits:
Time Frame
Discounted Costs
Discounted Benefits
Start
$8,000
0
After 1 Year
-$16,000 / (1 + 10 percent)1 = $14,545.45
0
After 2 Years
-$20,000 / (1 + 10 percent)2 = $16,528.93
$80,000 / (1 + 10 percent)2 = $66,115.70
After 3 Years
-$27,500 / (1 + 10 percent)3 = $20,661.16
$92,500 / (1 + 10 percent)3 = $69,496.62
The final calculation sums up the Discounted Benefits and the Discounted Costs and then divides them, resulting in:
$135,612.32 / $59,735.54 = 2.27
Analyzing the Results
The resulting figure means that $2.27 is expected to be generated per $1 invested. It can be used by both internal stakeholders and potential external investors to gauge if the asset or project is worth the risk.
If the BCR came back at less than 1, it would indicate an Internal Rate of Return (IRR) that is lower than the discount rate. This reading would also show that the net present value of the project or asset is projected to be negative.
If the BCR is 1, this essentially means the net pre-set value is zero. The IRR would be equal to the discount rate.
If, however, the BCR is more than 1 – as in the example above – it means the IRR is higher than the discount rate, and the net present value is more than zero.
It’s important to consider that these are only assumptions. If, for example, the cash flow forecasting is incorrect or the discount rate is off, the ratio can provide wide variances.
Conclusion
Whether it’s an internal stakeholder or a potential investor, this ratio can and should be used as part of a holistic financial analysis program.
Disclaimer
These articles provide general information on tax, accounting, and financial topics for small businesses and individuals. They are educational in nature and are not specific legal, accounting, financial, tax, or other professional advice, and should not be relied upon as such. This content was prepared by Service2Client and may have been reviewed or edited by the website owner for accuracy and compliance. Look for a trust mark below for verification details. No representation is made that any approach described will achieve a particular result, and no regulatory or professional body has reviewed or endorsed this content. Because each situation is different, readers should consult a qualified professional about their specific circumstances before acting. Images accompanying these articles are protected by copyright and may not be copied or reused.
The Customer Acquisition Cost (CAC) measures how much a company spends to obtain new, additional customers. Oftentimes, it’s used with the customer lifetime value (LTV) metric, which also projects the customer’s profitability to calculate the newly acquired customer’s value.
It’s primarily used to measure a business’ sales and marketing departments to figure out their profitability, profit margin and return on investment figures.
How to Calculate
CAC = Sales and Marketing Expense/Number of New Customers
Where: Examples of the expenses include product and service promotion expenditures, special compensation and commissions, regular wage payments, and operating expenses.
The tally of newly acquired customers is simply how many new, unique contracts the business acquired. It’s important to keep the expenses and customer acquisition numbers consistent over the same periods.
Why It’s Important
Business owners and their managers, along with investors, can look at sales and marketing efforts from a return on investment on their expenditures and outcomes. For example, there could be multiple channels that sales and marketing utilize to obtain new customers over a quarter, half-year, or 12-month period (such as email marketing, social media marketing, conferences, etc.). Based upon each channel, the customer acquisition cost is determined by dividing the financial outlay per customer acquired.
From there, each channel can be analyzed to see which one works well and, equally important, which ones don’t work well and either need to be discontinued or modified. Internal stakeholders and external investors (both existing and potential) can look at trends to see if existing management is productive or needs to be replaced with more competent individuals.
Accounting Considerations
Based on FASB’s Accounting Standards Codification 340-40, businesses are required to document and capitalize incremental costs of securing new customer business if the related expenses are projected to be recouped.
An incremental cost in the scope of obtaining a contract is a cost an entity incurs to obtain a contract that wouldn’t have been incurred if the contract hadn’t been obtained.
While a sales commission (be it fixed or a percentage of a new contract) may be considered an eligible incremental cost to one of its employees, it’s not necessarily always the case. Rather, the true test of whether an incremental cost is capitalizable depends on the subjective interpretation of whether a mandated financial expenditure for an incremental cost is attributed to signing a contract with a new customer.
The following sample situations often require more investigation to determine whether the capitalization of costs is applicable:
Equity issuances based upon meeting production and essential function goals
Employee compensation according to previous years’ executed contracts
Sales commissions allocated over multiple time frames and/or to more than one employee for a single contract.
ASC 340-40 also stipulates the amortization schedule of capitalization costs of obtaining a customer contract on a scheduled timeline that follows the delivery to the customer of the contracted goods or services.
Conclusion
While the customer acquisition cost may be straightforward, when it comes to subjective cases, businesses that have experience with murkier situations are able to make the most of their subjective sales and marketing expenses when navigating the tax and accounting landscape.
What is the Customer Acquisition Cost?
The Customer Acquisition Cost (CAC) measures how much a company spends to obtain new, additional customers. Oftentimes, it’s used with the customer lifetime value (LTV) metric, which also projects the customer’s profitability to calculate the newly acquired customer’s value.It’s primarily used to measure a business’ sales and marketing departments to figure out their profitability, profit margin and return on investment figures.
How to Calculate
CAC = Sales and Marketing Expense/Number of New CustomersWhere: Examples of the expenses include product and service promotion expenditures, special compensation and commissions, regular wage payments, and operating expenses.The tally of newly acquired customers is simply how many new, unique contracts the business acquired. It’s important to keep the expenses and customer acquisition numbers consistent over the same periods.
Why It’s Important
Business owners and their managers, along with investors, can look at sales and marketing efforts from a return on investment on their expenditures and outcomes. For example, there could be multiple channels that sales and marketing utilize to obtain new customers over a quarter, half-year, or 12-month period (such as email marketing, social media marketing, conferences, etc.).
Accounting Considerations
Based on FASB’s Accounting Standards Codification 340-40, businesses are required to document and capitalize incremental costs of securing new customer business if the related expenses are projected to be recouped.An incremental cost in the scope of obtaining a contract is a cost an entity incurs to obtain a contract that wouldn’t have been incurred if the contract hadn’t been obtained.While a sales commission (be it fixed or a percentage of a new contract) may be considered an eligible incremental cost to one of its employees, it’s not necessarily always the case.
Conclusion
While the customer acquisition cost may be straightforward, when it comes to subjective cases, businesses that have experience with murkier situations are able to make the most of their subjective sales and marketing expenses when navigating the tax and accounting landscape.
Alan F Burke CPA
Understanding the Customer Acquisition Cost
May 1, 2026 · Accounting News, Blog
⏱ 5 min read
The Customer Acquisition Cost (CAC) measures how much a company spends to obtain new, additional customers. Oftentimes, it’s used with the customer lifetime value (LTV) metric, which also projects the customer’s profitability to calculate the newly acquired customer’s value.
It’s primarily used to measure a business’ sales and marketing departments to figure out their profitability, profit margin and return on investment figures.
How to Calculate
CAC = Sales and Marketing Expense/Number of New Customers
Where: Examples of the expenses include product and service promotion expenditures, special compensation and commissions, regular wage payments, and operating expenses.
The tally of newly acquired customers is simply how many new, unique contracts the business acquired. It’s important to keep the expenses and customer acquisition numbers consistent over the same periods.
Why It’s Important
Business owners and their managers, along with investors, can look at sales and marketing efforts from a return on investment on their expenditures and outcomes. For example, there could be multiple channels that sales and marketing utilize to obtain new customers over a quarter, half-year, or 12-month period (such as email marketing, social media marketing, conferences, etc.). Based upon each channel, the customer acquisition cost is determined by dividing the financial outlay per customer acquired.
From there, each channel can be analyzed to see which one works well and, equally important, which ones don’t work well and either need to be discontinued or modified. Internal stakeholders and external investors (both existing and potential) can look at trends to see if existing management is productive or needs to be replaced with more competent individuals.
Accounting Considerations
Based on FASB’s Accounting Standards Codification 340-40, businesses are required to document and capitalize incremental costs of securing new customer business if the related expenses are projected to be recouped.
An incremental cost in the scope of obtaining a contract is a cost an entity incurs to obtain a contract that wouldn’t have been incurred if the contract hadn’t been obtained.
While a sales commission (be it fixed or a percentage of a new contract) may be considered an eligible incremental cost to one of its employees, it’s not necessarily always the case. Rather, the true test of whether an incremental cost is capitalizable depends on the subjective interpretation of whether a mandated financial expenditure for an incremental cost is attributed to signing a contract with a new customer.
The following sample situations often require more investigation to determine whether the capitalization of costs is applicable:
Equity issuances based upon meeting production and essential function goals
Employee compensation according to previous years’ executed contracts
Sales commissions allocated over multiple time frames and/or to more than one employee for a single contract.
ASC 340-40 also stipulates the amortization schedule of capitalization costs of obtaining a customer contract on a scheduled timeline that follows the delivery to the customer of the contracted goods or services.
Conclusion
While the customer acquisition cost may be straightforward, when it comes to subjective cases, businesses that have experience with murkier situations are able to make the most of their subjective sales and marketing expenses when navigating the tax and accounting landscape.
What is the Customer Acquisition Cost?
The Customer Acquisition Cost (CAC) measures how much a company spends to obtain new, additional customers. Oftentimes, it’s used with the customer lifetime value (LTV) metric, which also projects the customer’s profitability to calculate the newly acquired customer’s value.It’s primarily used to measure a business’ sales and marketing departments to figure out their profitability, profit margin and return on investment figures.
How to Calculate
CAC = Sales and Marketing Expense/Number of New CustomersWhere: Examples of the expenses include product and service promotion expenditures, special compensation and commissions, regular wage payments, and operating expenses.The tally of newly acquired customers is simply how many new, unique contracts the business acquired. It’s important to keep the expenses and customer acquisition numbers consistent over the same periods.
Why It’s Important
Business owners and their managers, along with investors, can look at sales and marketing efforts from a return on investment on their expenditures and outcomes. For example, there could be multiple channels that sales and marketing utilize to obtain new customers over a quarter, half-year, or 12-month period (such as email marketing, social media marketing, conferences, etc.).
Accounting Considerations
Based on FASB’s Accounting Standards Codification 340-40, businesses are required to document and capitalize incremental costs of securing new customer business if the related expenses are projected to be recouped.An incremental cost in the scope of obtaining a contract is a cost an entity incurs to obtain a contract that wouldn’t have been incurred if the contract hadn’t been obtained.While a sales commission (be it fixed or a percentage of a new contract) may be considered an eligible incremental cost to one of its employees, it’s not necessarily always the case.
Conclusion
While the customer acquisition cost may be straightforward, when it comes to subjective cases, businesses that have experience with murkier situations are able to make the most of their subjective sales and marketing expenses when navigating the tax and accounting landscape.
Disclaimer
These articles provide general information on tax, accounting, and financial topics for small businesses and individuals. They are educational in nature and are not specific legal, accounting, financial, tax, or other professional advice, and should not be relied upon as such. This content was prepared by Service2Client and may have been reviewed or edited by the website owner for accuracy and compliance. Look for a trust mark below for verification details. No representation is made that any approach described will achieve a particular result, and no regulatory or professional body has reviewed or endorsed this content. Because each situation is different, readers should consult a qualified professional about their specific circumstances before acting. Images accompanying these articles are protected by copyright and may not be copied or reused.
Artificial intelligence is driving an unprecedented surge in data center construction. Developers, private equity sponsors and their tax advisors are navigating a complicated web of questions that touch everything from ownership structure to site selection to power sourcing. Get the early decisions wrong and the tax consequences can follow a project for years.
