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The rapid rise in cloud computing, AI and data-driven technologies has launched a new era of digital infrastructure — with data centers at its core. Whether you're streaming a movie, storing files in cloud or using AI tools, chances are your data has passed through a data center. As data centers become the backbone of the digital economy and a cornerstone of modern global infrastructure, they also present complex tax challenges, blending traits of traditional real estate and other infrastructure assets due to the energy- and tech-related issues that may arise.
1. Why taxing data centers isn’t business as usual
Data centers aren’t your average commercial property. These facilities house computer systems, servers, networking gear and storage — equipment that's as vital to the digital economy as roads are to the physical one. Because of their high value, large real estate presence, potential applicable tax incentives, significant energy consumption and global footprint, taxing data centers can complicate your tax planning — federal, state and local as well as international. To manage your assets strategically, tax leaders need to align their operational footprint with evolving regulations, incentives and long-term business goals.
At a basic level, data centers are exposed to a number of taxes.
- Property taxes on real estate and equipment.
- Sales and use taxes on hardware like servers and cooling systems.
- Corporate and entity-level income taxes based on ownership and operational models.
- Transfer taxes, especially when land or buildings change hands.
- Trade and customs taxes and tariffs, which can affect the cost and timing of non-domestic critical and high-cost materials and equipment.
And that’s just the beginning.
2. How to structure data center investments for long-term tax advantage
Data centers don’t fit neatly into traditional investment molds — and neither should their holding structures. Among a variety of options such as partnership and corporate entities, REITs remain a favored vehicle for tax-efficient ownership, but whether a REIT is the proper holding vehicle depends on a variety of factors.
REITs offer the potential to reduce corporate-level tax through a dividend paid deduction and can provide efficient tax strategies for dispositions. However, REITs come with strict requirements for qualification including compliance with quarterly asset tests and annual income tests. At the end of the day, the business strategy should drive the structure.
Here are some key factors to weigh when determining the appropriate structure to include.
- Investor mix matters: Tax-exempt and foreign investors may face limitations through Unrelated Business Taxable Income (UBTI) or Foreign Investment in Real Property Tax Act (FIRPTA) considerations, which may increase the benefits of utilizing a REIT.
- Timing is critical: Deferring a REIT election until scale is achieved may defer benefits, but it could also trigger built-in gains tax under IRC §1374 if assets appreciate in the meantime.
- TRS required? Some data center services generate income that must flow through a taxable REIT subsidiary (TRS) to preserve REIT qualification.
- Exit tax treatment: For non-US investors, sales of REIT stock may allow for more favorable outcomes, so it may be best to structure assets in multiple REITs to allow for more efficient exits.
- Cost and complexity: While REITs can provide material benefits to investors, they do come with additional costs and it’s important to take those costs into account when determining the most efficient structure.
Bottom line? REITs can drive capital efficiency — but only if tailored to the investment horizon, service model and stakeholder profile.
3. FIRPTA in focus: Where global investment meets hidden tax risk
Foreign capital is surging into US data infrastructure — and with that comes complexity. FIRPTA turns what looks like a clean exit into a tax event if not managed from Day One.
That’s the trap: FIRPTA is often considered a disposition issue. In reality, it’s a build-through-exit issue. Here’s why.
- Common development actions — like conveying land for a substation or granting easements — may trigger US tax exposure under FIRPTA.
- Foreign-backed funds often prohibit FIRPTA-triggering events at exit but may overlook risks during the build phase.
- Mid-project restructuring can inadvertently create US real property interest (USRPI) dispositions, leading to withholding and filing obligations. Certain non-US investors may also be able to benefit from specific exemptions to FIRPTA, and ensuring their investment is structured appropriately so they can benefit from those exemptions from Day One will be critical.
For tax leaders, the takeaway is clear: Don't treat FIRPTA as an afterthought. Build your structure and strategy together. Otherwise, you risk introducing investor-level conflicts — or worse, unplanned US tax exposure — just when you're trying to stabilize or exit the project.
4. Navigating state and local considerations
At the state and local level, the picture is even more fragmented.
- Some states levy transfer taxes and others don’t, but in states that don’t levy transfer taxes, local governments might.
- Certain structures may require moving assets between entities to help maintain REIT status, so you need to think through transfer tax considerations up front to limit exposure.
- Some state and local governments provide property tax abatements or sales tax exemptions to attract data center investment.
- State conformity with federal tax benefits varies.
- State and local grants can provide valuable incentives for data center projects, but REITs must navigate them carefully.
- Depending on the nature and timing of grant receipts and the overall income within the REIT itself, a TRS may be required.
- Operational commitments tied to grants — like job creation or energy usage — may need to be fulfilled by non-REIT entities to avoid disqualifying activities.
5. Carving out tax incentives for tech infrastructure
Many governments want to attract data centers — not just because they bring investment, but because they're foundational to AI, cloud computing and modern business. This has led to a variety of incentive programs.
- Sales and use tax exemptions for qualifying equipment.
- Job creation credits for hiring locally.
- Research and development credits for tech-driven facilities.
- Accelerated depreciation for qualifying equipment. The One Big Beautiful Bill Act permanently reinstated 100% bonus depreciation and introduces a new provision that permits immediate expensing of certain nonresidential real property.
- Energy efficiency incentives for qualifying renewable energy investments. The One Big Beautiful Bill Act reshapes energy tax incentives by modifying certain credits, accelerating phase-outs and revising eligibility criteria. Clean electricity production and investment credits for wind and solar will sunset for projects placed in service after December 31, 2027, unless construction begins within 12 months of enactment. At the same time, the law enhances the advanced manufacturing investment credit—raising it from 25% to 35% for qualifying property placed in service after December 31, 2025.
Data centers may qualify for state-level clean energy or decarbonization programs, especially when they commit to using or generating renewable power.
6. Designing around the tax code: Structuring strategies
Sophisticated structuring helps data center investors minimize tax. Consider these common strategies.
- Using Special Purpose Vehicles (SPVs) to isolate liability and optimize tax treatment for foreign investors.
- DevCo / YieldCo and OpCo / PropCo structures separate development operations from property ownership — each taxed differently and each with different return profiles.
- Debt push-down strategies to reduce effective tax rates by allocating debt and interest expense where they’re most useful.
Such arrangements are legal and commonly used, but they make the tax landscape much more complex for governments and citizens trying to ensure fair taxation.
7. Challenges and the road ahead
Despite the benefits data centers bring, they also pose challenges.
- Power and water strain: Data centers use immense resources, and that can spark tension with local utilities and communities.
- Equity concerns: Local taxpayers may ask why corporations and data center developers receive tax breaks while they do not.
As public demand for digital infrastructure grows, pressure on lawmakers may increase to simplify and modernize how these facilities are taxed.
Conclusion: Why it matters to you
In a high-growth, high-cost environment, proactive tax planning isn’t a back-office function — it’s a core investment lever. From deal modeling and REIT qualification to credit capture and treaty structuring, tax strategy should be integrated from Day One. That means tax leaders need to get involved early — before site selection, structuring or capital commitments are finalized. Translating technical tax considerations into strategic insights is essential to a project’s long-term value. Data centers may be physical — but their value is built on invisible, strategic architecture. Start with tax.
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