Running a hotel is a costly operation. From hiring and managing staff members to maintaining the building to the standard that guests expect, hoteliers must seize any savings opportunities that arise. While the federal tax code does not provide very many incentives for businesses in the hospitality industry, those incentives that are available may be quite lucrative when applied correctly.
Here are five potential tax savings opportunities that may help hoteliers improve cash flow for reinvestment in their businesses:
1) Work Opportunity Tax Credit (WOTC)
The federal Work Opportunity Tax Credit (WOTC) was designed to help pave a path to financial self-sufficiency for individuals belonging to groups that have traditionally faced barriers to employment. WOTC rewards employers with a tax credit of up to $9,000 for each new employee that they hire from one of the target groups, which include certain veterans, youths, and recipients of government aid. The credit is relatively straightforward: there is no limit on the number of new employees who may qualify, and businesses may receive WOTC for all wages paid as long as the employee works at least 120 hours. Unfortunately, a lack of awareness about WOTC’s benefits prevents many employers from claiming it, but those that do enjoy significant tax savings to help offset the cost of staffing.
2) Section 179D
Commercial buildings are notorious for the vast amount of energy they consume, and hotels, with their twenty-four hour use of utilities, are particularly prone to large consumption. In addition to the detrimental effect that such usage has on the environment, hotels grapple with hefty utility expenses. Fortunately, §179D of the tax code rewards building owners with a deduction of up to $1.80 per square foot for installing energy-efficient upgrades to new or existing buildings. Specifically, §179D provides a deduction of up to $.60 per square foot for improvements to lighting systems, $.60 for HVAC (including water heaters), and $.60 for the building envelope. The upgrades must exceed the standards of ASHRAE 90.1-2001 by at least 50 percent. Taxpayers must have their projects certified by an approved third party in order to qualify for the §179D deduction. In addition to reducing utility costs, enhancing the comfort of guests and tenants, and improving the property’s aesthetic appeal, energy-efficient improvements may help hoteliers save hundreds of thousands of dollars with the §179D deduction.
WOTC and the §179D deduction have never been permanent parts of the tax code and therefore, they typically lapse at the end of each year. However, due to their widespread popularity, they are almost always renewed retroactively. Both incentives expired most recently on December 31, 2014. In July 2015, the Senate Finance Committee overwhelmingly approved a bill that would extend the incentives through the end of 2016. In addition, the bill would require taxpayers claiming the §179D deduction to meet the standards of the newer ASHRAE 90.1-2007 and would add individuals who have exhausted their unemployment benefits to the list of target groups qualifying for WOTC. While the fate of these provisions remains uncertain pending further Congressional action, businesses should still consider them in their tax-planning strategies for this year in anticipation of their retroactive renewal.
3) Sales Tax Review
With rates varying among the nearly 10,000 sales tax jurisdictions in the U.S., properly paying sales and use taxes is a confusing process for any business. Each year, many businesses overpay their sales tax due to misunderstanding the amount that they owe. Hotels, with their occupancy taxes and taxes on sales of goods in their restaurants or gift shops, may be particularly at risk of committing this error. A professional sales tax review provides a worthwhile investment for businesses, helping them to identify overpayments and claim refunds.
4) Tangible Property Regulations
Hotels are full of tangible property assets that often require repair, replacement, or improvement. The tax code’s tangible property regulations, which went into effect on January 1, 2014, allow all taxpayers who have acquired, produced, or improved tangible property to expense items that were capitalized as improvements in previous years. As a result, taxpayers can capture additional deductions and losses, freeing up cash to be reinvested in the business. Taxpayers seeking to reap the benefits of the tangible property regulations should maintain thorough documentation of improvements, repairs, and dispositions of assets.
5) Cost Segregation
Building owners often miss out on the opportunity to seize all of the deductions available to them through asset depreciation. A cost segregation study may be the key needed to unlock these deductions and improve cash flow. According to the tax code, real property is typically depreciated over 39 years, while tangible personal property assets are depreciated over five, seven, or fifteen years. Cost segregation reclassifies certain items of real property as tangible personal property with shorter depreciation lives. A cost segregation study performed on a hotel, for example, may reclassify items, such as certain light fixtures, floor coverings, and interior facades, as tangible personal property, resulting in accelerated depreciation deductions and more immediate tax savings.
Contact us today to capture Federal tax benefits linked to your building projects.