There’s no easy way to say it—the lodging industry will likely face tax challenges in the next 12 months. The past year was fraught with congressional bickering, partisanship, gridlock, and, consequently, no passage of any major tax legislation. There was plenty of drama too, including the troubled rollout of the Affordable Care Act, congressional hearings over lost and retrieved IRS emails, and so-called corporate inversions, with U.S. companies acquiring foreign corporations, swapping headquarters, and reducing their U.S. tax load. This was all capped off by a shift in control of the U.S. Senate after the midterm elections.
Through it all, Congress and the Obama Administration have talked about various fixes to the tax code, but reform has largely remained at the bottom of the to-do list. Now, the new head of the Senate Committee on Finance and the newly minted chairman of the House Committee of Ways & Means, say that tax reform is a top priority.
And at the insistence of the National Taxpayer Advocate, the IRS has recently adopted an official Taxpayer Bill of Rights. It’s not the Magna Carta but certainly a step in the right direction. As 2015 begins, the most important impact of 2014 will be the new rules that will affect tax compliance and tax return requirements, which either stem from the Tax Increase Prevention Act of 2014 (TIPA) or will be triggered by earlier legislation, rulings, and treasury regulations.
Affordable Care Act
Beginning Jan. 1, 2015, employers with at least 100 full-time (or equivalent) employees must offer affordable health coverage that provides a minimum value to these employees and their dependents. If not, the employer will be subject to an employer shared responsibility payment if at least one full-time employee receives a premium tax credit for purchasing coverage through one of the new Affordable Insurance Exchanges. Employers must offer coverage to at least 70 percent of full-time employees to avoid an assessable payment. For employers with 50 to 100 employees, the shared responsibility is deferred until 2016 if appropriate certifications are available, but the coverage percentage will increase to 95 percent. Also, for employer plan years beginning Jan. 1, 2014, and thereafter, the Affordable Care Act mandates that employee wait periods for coverage cannot exceed 90 days, including holidays and weekends, after an employee is otherwise eligible.
2015 is also the first year that individuals must carry minimum essential coverage or make a shared responsibility payment with their personal tax returns. The IRS has created a number of forms and instructions to carry out these rules, but it will likely be a challenging year for human resource and payroll departments, as well as for accountants.
TIPA was enacted in December 2014 to extend more than 50 popular—but temporary—tax incentives. These benefits will be applied retroactively through 2014 but have, unfortunately, been set to expire on Dec. 31. This means that these rules will not apply in 2015 without congressional and presidential action. Regardless of the act’s temporary nature, taxpayers will see benefits on their 2014 tax returns. Some incentives of keen interest to the hospitality industry include: 50 percent bonus depreciation, a 15-year write-off for qualified real estate investments, an increase to Section 179 expensing, an extension of the Work Opportunity Tax Credit, and an enhanced deduction for food inventory.
New Capitalization Rules
Last year was a busy one for the IRS in the capitalization arena, and the regulations that were passed will require much vigilance during the 2015 tax year and beyond. Final guidance was issued in many areas, in particular the rules regarding losses resulting from “partial dispositions” of property. IRS regulations generally affect all taxpayers that acquire, produce, or improve tangible property but especially impact lodging facilities, as these require continual upgrades, remodeling, and refreshes. Hospitality finance executives should be alert to the numerous elections required with 2014 tax returns.
On Dec. 23, 2014, the IRS accepted a request for guidance as part of its Industry Issue Resolution (IIR) program regarding capitalization rules for restaurants. The objective of the IIR program is to resolve common issues with a specific emphasis on the Unit of Property (UOP) rules, refresh and remodel expenses, and general maintenance and repair expenses.
The New Year
Overall, 2015 will be a challenging year for the hospitality industry. Hopefully, we will see comprehensive tax reform and tax incentives become permanent.
SOME HIGHLIGHTS OF THE NEW CAPITALIZATION RULES
- De Minimis Safe Harbor
This allows a taxpayer to deduct amounts paid for tangible property if the costs are not greater than specific dollar amounts determined at the invoice or item level, if consistent with financial statements. The dollar threshold is $5,000 per invoice or per item as substantiated ($500 if there are no audited financial statements).
- Overall Plan of Rehabilitation Doctrine Now Obsolete
The final regulations provide that indirect costs, such as repairs incurred during a period of renovation, do not need to be capitalized if not related to the capitalized improvement. The judicial doctrine that required all costs incurred as part of an overall plan of rehabilitation to be capitalized is obsolete.
- New Annual Election
Small business taxpayers may elect a safe harbor for repairs, maintenance, and improvements to buildings, as long as eligible property does not exceed 2 percent of the unadjusted basis of the eligible building or $10,000, whichever is less.
- Unit of Property Modification for Buildings
A taxpayer is now required to analyze improvement costs relative to eight building systems defined in the regulations to determine proper treatment. Material improvements to any of these systems will require capitalization, even though the cost may be small relative to the entire building.
- Replacement of Major Components or Structural Parts of Buildings
This allows for a loss on the disposition or replacement of a major component of a building (e.g., a roof). Prior to final regulations, taxpayers were required to continue to depreciate items that had already been replaced.
Leo Parmegiani is a CPA and tax partner in the firm of PKF O’Connor Davies, a division of O’Connor Davies LLP, in New York City. www.odpkf.com