November 2011
Intro:
In today’s
competitive hospitality market, it’s essential to approach improvements
and
renovations with a comprehensive strategy and an understanding of how
you can
benefit from a variety of tax deductions available to hotel owners. Can
improvements
actually pay for themselves through smart tax strategies like cost
segregation
and making energy efficient upgrades? Can you still take advantage of
past
renovations or somehow take a deduction for new equipment purchased or
leased
this year? Looking at the big picture and working with the
right
professionals as you plan your renovations and upgrades can provide a
big
payoff in tax savings and boosting your cash flow this year and in
years to
come.
The hospitality industry has never been more
competitive
than it is today, as hotel owners face consumers’ increasingly high
standards
and reduced travel budgets, as well as increased operating and
construction
costs. To survive in the industry today,
it’s essential to understand the tax strategies that result in
increased cash
flow and can actually provide funding for renovations, improvements,
and energy
efficiency upgrades. Understanding the
tax opportunities that are currently available will allow you to
develop a
comprehensive plan for improvements that makes financial sense and
allows you
to maintain a property that offers everything today’s consumer demands.
Hotel owners face some unique challenges in
maintaining a
financially viable business. There are
building
maintenance and renovation concerns, interior furnishings and often
extensive
exterior elements to oversee, as well as day to day operations,
staffing and
customer service. Hotel owners looking
at a “big picture” scenario of saving money through energy efficiency
have to
consider the cost of making the necessary improvements to the property.
You
might want to retrofit your existing hotel property with energy
efficient lighting,
HVAC or upgrades to the building envelope in order to save money on
energy
costs, but you’ve first got to come up with the funding for those
improvements. Do you provide the
required capital or continue to face increased operating costs?
The ROI on new, energy-efficient systems may
take longer,
but the equipment will perform more reliably while providing better
working
conditions and lowering energy costs along the way.
Most hotel owners will assume that funding
for energy efficient upgrades has to come from dipping into their
equity in the
facility, or from an outside funding source such as a bank loan. The good news is that hotel owners can take
advantage of targeted tax and energy strategies that can significantly
increase
operating cash flow and generate a substantial ROI, as well as funding
energy
efficiency projects through a significantly lowered tax burden.
A review of the real property assets may
identify tangible
personal property reducing the class lives to five, seven and 15 years
for
taxation purposes, which reduces current income tax obligations. Personal property assets include a building’s
non-structural elements, exterior land improvements and indirect
construction
costs. Although the list is long, a few
examples of items that can be reclassified include cabinetry,
decorative
millwork and lighting, some types of flooring and wall coverings, and
specialty
electrical and plumbing. Hotels can
typically benefit from this strategy because they contain large amounts
of
personal property in guest rooms, restaurants, and conference
facilities.
Exterior features such as paving, fencing, sidewalks and lighting are
also
eligible. When these assets’ lives are
shortened, depreciation expense is accelerated and tax payments are
decreased, which
frees up cash for other uses.
The ideal time to initiate this strategy is during the planning phase of building a
new property, remodeling or expanding an existing building. At this time, project-related costs that
qualify for a shorter depreciable life can be identified, segregated
and
reclassified as they are incurred, instead of waiting until the project
is
completed. For
capital construction projects and newly acquired buildings, an accurate
assignment of costs will allow a taxpayer to "front load" cost
recovery and cash flow, maximizing them in the immediate years
following the
construction or purchase.
However, the benefits of this strategy may be
retroactive, including buildings that have been purchased, constructed,
expanded or remodeled since 1987. This
allows taxpayers to bring forward previously unrecognized depreciation,
which
can significantly increase cash flow in the current year.
For those hotel owners who have leased or purchased equipment and put it into service in 2011, the §179 deduction and bonus depreciation will allow you to deduct the full purchase price (within specified dollar limits) of the equipment.
The Economic Stimulus Act
of 2008 increased the §179 deduction limit to $500,000 and the
total amount of
equipment that can be purchased to $2 million from the previous amount
of
$200,000. A one-time Bonus Depreciation was also added, which now
allows
businesses to write off 100 percent of the purchase price of new
equipment or other assets during the year they were purchased, as
opposed to
taking depreciation through annual deductions over time.
Most
business equipment, software, office furniture and even some vehicles
can
qualify for the §179 deduction, including the following:
- Equipment or
machinery purchased for business use
- Tangible personal
property used in business
- Business Vehicles
with a gross vehicle weight in excess of 6,000 lbs
- Computer Software
- Office Furniture
& Equipment
- Property attached
to your building that is not a structural component of the building
(i.e.: a printing press, large manufacturing tools and equipment)
- Partial Business
Use (equipment that is purchased for business use and personal use –
generally, your deduction will be based on the percentage of time you
use the equipment for business purposes.)
Consider
a scenario where you lease or finance some of the above equipment for
your
hotel property during 2011. Your business can deduct the full purchase
price of
that equipment in 2011, yet you’ve only made a few payments.
Additionally, you
have the benefit of putting the new equipment into use.
179D
Another potential tax benefit for hotel
properties goes hand
in hand with energy efficient building projects and improvements. §179D of the Energy Policy Act of 2005
provides guidelines for tenants and building owners who may be eligible
for tax
deductions for implementing energy efficiency components in commercial
buildings. These deductions are
applicable to buildings that were either built or retrofitted after
December
31, 2005, and must be certified by a qualified third party.
§179D includes full and partial tax
deductions for
investments in energy efficient commercial buildings that are designed
to
increase the efficiency of energy-consuming functions.
The deduction available is up to $.60 per
square foot for lighting, HVAC and building envelope, creating
potential for
$1.80 per square foot if all three components qualify.
Hotel owners can look at anything from energy
efficient lighting and HVAC systems to air barrier systems, green roof
or cool
roof systems, insulation and sealant systems, insulated exterior
cladding and
deck coating, and window glazing or tinting to qualify for the
§179D
deduction. Enlisting the aid of
qualified professionals to coordinate your green/efficient building
improvements can not only
pinpoint the most effective improvements to make initially, but should
result
in a cohesive plan to ensure that you receive the maximum energy
savings and
tax benefit from your capital expenditure.
Professional expertise is especially
valuable when looking
at HVAC system upgrades that will qualify for the §179D deduction. The building that is to be improved with the
new HVAC system must be modeled by a qualified individual using IRS
prescribed
software, and blueprints/plans and specifications for the new system
also need
to be provided. In order for the HVAC
system to qualify for the $.60 per square foot deduction, it must save
at least
16 2/3% in energy costs over the minimum requirements established by
ASHRAE
90.1-2001. Based on the specific needs
and characteristics of a hotel property, as well as the variety of HVAC
and
control systems available in the marketplace today, it makes sense to
model any
and all possible systems to find the most cost effective solution for
the
property. Once the study has been
completed, third party certification is required in order for the
system to
qualify.
With §179D deductions and future energy
cost savings as
incentives, making qualifying improvements to hotel facilities offers
taxpayers
powerful strategies to fund energy projects or increase cash flow.
In addition, the issuance of Revenue
Procedure 2011-14 will
allow some taxpayers to claim the §179D deduction all the way back
to January
1, 2006 without filing one single amended income tax return. This means
that a
taxpayer could potentially claim deductions from 2006-2010 (or 2011)
all on one
return and significantly reduce their tax burden, if not eliminate it
altogether.
The opportunities for tax savings and
enhanced planning are
available with the right knowledge and planning. Putting
these effective tax and energy
strategies to work for you makes smart business sense and can make the
difference in today’s hospitality marketplace.
For
more
information please contact [email protected] directly at 602.741.7776
CAPITAL
REVIEW
GROUP does not advise on any personal income tax requirements or
issues. Use of
any information from this document or web site referred to is for
general
information only and does not represent personal tax advice either
express or
implied. You are encouraged to seek professional tax advice for
personal income
tax questions and assistance.
Marky Moore, Founder
of Capital Review Group in Phoenix is a Certified Sustainable Building
Advisor
and an Accredited Professional for the U.S. Green Building Council's
Leadership
in Energy and Environmental Design (LEED AP) and has a thorough
understanding
of green building practices and principles, as well as the LEED rating
system.
She works with engineers and
architects on one
hand, and CPAs and tax advisors on the other, to achieve the maximum
Federal
Tax deductions for a building's energy efficiency and depreciation. She
started
CRG in 2004 to provide critical tax and specialty services to
professional
advisors, clients and institutional partners. The company offers
services in
several major areas:, the 2005 Energy Policy Act/Section 179D, business
tax credits
and specialty construction/engineering consulting, and Cost
Segregation. Ms. Moore
is a featured speaker in the industry and has authored articles for
major
industry publications.