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. 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.
A real property analysis may identify and reclassify personal property assets to shorten the depreciation time into lives of 5 to 15 years for taxation purposes, which reduces current and potentially future income tax obligations. Personal property assets include a building’s non-structural elements, some 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 specific lighting, some types of flooring and wall coverings, and specialty electrical and plumbing. Hotels can typically benefit from this analysis 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.
These benefits are retroactive, including buildings that have been purchased, constructed, expanded or remodeled since 1987. This allows taxpayers to recapture previously unrecognized depreciation, which increases cash flow in the current year.
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 may 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 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. 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 net affect may be that your energy efficiency projects may be funded by monies already owed from overpaid depreciation reducing your overhead energy costs or reducing your tax burden…or both. It is a prudent move in this economy to explore the CRG Capital Discovery™ – pro bono preliminary review.