Hotel owners now have a multitude of tax benefits available to them. These benefits come in the form of both conventional tax incentives like cost segregation, which has recently undergone changes, to incentives that help save energy, like alternative energy credits and the EPAct 179D tax deduction. Savvy hotel owners can dramatically reduce their taxable income by utilizing these tax incentives.
Cost Segregation
Traditionally, hotel owners that built or purchased a new property would depreciate the new asset over 39 years. Cost segregation breaks the total cost into different buckets based on whether the bucket is related to a typical building (39-year property) or instead is related to the unique business being conducted in that building (five- or seven-year property) or simply improving the land itself (15-year property). By categorizing properties into faster depreciation schedules, an owner can recoup an average of 5 to 10 percent of project cost based on the Net Present Value (NPV) generated.
Typical five- or seven-year hotel property includes: carpet, blinds, shelving, décor, appliances, washer/dryers, wiring, and plumbing connected to appliances and machinery, mirrors, furniture, etc. Fifteen-year land improvements include: parking lots, site sewers, paving, curbing, fences, landscaping, non-building related excavation, dumpster pads, exterior light posts, parks, tennis and basketball courts, dog parks, gardens, outdoor pools, etc. The remaining building-related items stay as 39-year property: walls, roof, foundation, building lighting, doors, beams, windows, fire protection, etc.
New Capital and Repair Regulations
In October 2013, the IRS issued new permanent regulations (TD 9636) for the treatment of capital and repair-related purchases. When performing a cost segregation study, the properties allocated into depreciation buckets can be further segregated into building systems, describing the role they serve in the building. These categories are as follows: HVAC, plumbing, electrical, escalators, elevators, fire protection and alarms, security systems, gas distribution, and all other.
These additional building system categories facilitate accounting when building equipment is replaced in the future, which in turn allows for special treatment of the abandoned property as well as for replacement equipment.
Alternative Energy Credits
As an increasing number of hotels seek to explore sustainability options, many have found alternative energy as an attractive solution. Most alternative energy generating technologies are eligible for an additional tax credit, which, depending on the technology, is worth anywhere between 10 to 30 percent of the project cost. Geothermal, combined heat and power (CHP), wind, and solar P.V. are common technologies eligible for the alternative energy credit.
EPAct Section 179D
Another valuable depreciation benefit, if extended by Congress, will come in the form of the EPAct Section 179D tax deduction for energy efficiency. Hotels will be eligible for energy efficiency tax deductions of up to $1.80 per square foot. If a hotel’s energy reducing investment doesn’t qualify for the full $1.80 per square foot deduction, $0.60 per square foot tax deductions are available for any of the three major sub-systems: lighting; HVAC (heating, ventilation, and air conditioning); and the building envelope (roof, walls, windows, doors).
Hotel owners have found success installing LED lighting and VRF/VRV HVAC units, although centralized chillers and fluorescent lighting routinely trigger the benefit as well.
Charles R. Goulding attorney/CPA is the president of Energy Tax Savers, an interdisciplinary tax and engineering firm that specializes in EPAct 179D tax credits. Daniel Audette is an engineer with Energy Tax Savers. Daniel Audette is an engineer with Energy Tax Savers.
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