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Tax Saving Strategies for Hotel Owners


January 2, 2023

Using Cost Segregation for a Cash Infusion to Reinvest in Your Hotel

Running a successful hotel isn’t as simple as buying a property and renting rooms – although to the general public who frequent hotels, I’m sure that seems like the case. If you own a hotel, you already know the work it takes to become and remain profitable.

A successful hotel must be in a well planned geographic location with rental rates that reflect the area. There must be access to food and entertainment (or some other draw) if it doesn’t exist on site. Marketing and maintenance are two very costly and time consuming activities vital to the property. Admittedly, these activities only scrape the surface of what goes into running a hotel. The bottom line is, it takes an immense amount of capital to keep a hotel up to date and running.

In such a costly investment, being strategic with tax incentives could mean the difference between profit and deficit. Investing in a cost segregation study, especially while bonus depreciation is available, is an ideal way to free up cash flow early on and have more of your money in your pocket to deal with ongoing operating expenses or renovation projects.

What is Cost Segregation?

Cost segregation is the reclassification of building components into their shortest allowable class lives. This strategy front-loads depreciation expense and offsets tax liability, giving you extra cash early on when you need it the most. A cost segregation study can be executed on a hotel when the property is first purchased, built, or when renovations or updates are performed.

Engineering-based cost segregation studies should always be carried out by an experienced and credible firm. You can begin by having a discussion with your CPA, and they can work directly with an expert in the field. The results of the cost segregation study will ultimately be submitted to the IRS by your CPA alongside your annual business taxes. Think of a cost segregation study as an add on to your annual taxes giving you a leg up on your return.

A cost segregation study involves a multi-step process, including a physical inspection of the property, land improvements, and all related assets. The provider will prepare calculations and findings presented in the form of a report. This report is delivered to the property owner and their tax preparer to be used in computing depreciation expenses. It is worth noting that your cost segregation provider should offer complete audit protection in the unlikely event that you find yourself in a position of need.

Why Consider Cost Segregation for your Hotel?

Almost all commercial property qualifies for cost segregation, and many properties are prime for the benefit. Hotels in particular are ideal for this tax strategy due to the vast amount of 5-year property throughout that otherwise gets lumped into straight line depreciation. Carpets, specialty lighting, window treatments and more can all be depreciated over five years, which is a much shorter timeframe than the 39 year bucket they typically land in. This accelerated depreciation process offers hotel owners a valuable cash infusion for the upkeep of their property.

Hotels also tend to need regular updates in order to keep the property safe, modern, and appealing. These updates and renovations are a great opportunity for additional tax incentives.

The Benefit Outweighs the Challenge

If you own hotels, or are considering investing, it’s likely you are not a tax expert. Understanding taxes, the benefits, the incentives, and the strategies available to you is complex. While it may seem overwhelming, the right partner can truly help demystify it and ensure that you are maximizing your return. The key is to work with an expert in the field, rather than trying to figure it out for yourself.

Vertiax Advisors is experienced in tax incentives. We have taken the time to understand the hotel industry as it relates to owned assets and related taxes. With us as your trusted advisor, you can rest assured that you are in good hands. We guarantee excellent results, we will defend you in the unlikely case of an audit, and we will strictly adhere to all federal and state tax laws regarding real properties.

For more information or to chat about your property, reach out to our founder Chris Ostler, CPA today.

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