Tag: Hotel

The #1 Lie About Cost Segregation

Cost Segregation on Older Buildings?

It is impossible for me to calculate the number of calls I’ve had with building owners and CPAs on the subject of Cost Segregation. Working some numbers in my head (ok, on my calculator), the number is likely well over 10,000. Out of all those calls there is one particular item that continues to rear its ugly, uninformed head and I can no longer stay silent. I must respond… with vigor!

The “item” in question comes in the form of the following quote, which I’ve heard too often to count:

“You can only do Cost Segregation on a new building or new renovation.”

I have no idea where this rumor started. I hear it weekly and now I am blogging in rebuttal.

First, I will say an unequivocal “Yes”, it is beneficial to have a Cost Segregation study done when you purchase/construct/renovate a new building. In fact, anyone constructing or renovating a commercial property should have a study completed. However, the true power of Cost Segregation is displayed on buildings that are not new!

“But, you can only do Cost Segregation on a new building or new renovation”.

To officially rebut this statement, I will go straight to the source. The first sentence in the IRS Cost Segregation Audit Techniques Guide – Chapter 6.2 reads:

[box style=”2″][googlefont font=”Sanchez” size=”16px”]”A taxpayer may conduct a cost segregation study on used property and then recompute its depreciation deductions for prior years”. *[/googlefont][/box]

Not only “may” a taxpayer do this but over 75% of our projects are older properties. In the industry we call this the “Catch Up” method, and it can produce powerful results.

Here is an example:

Mr. Client acquires a commercial property for $3,500,000 five years ago and never completed a Cost Segregation Study.

Despite rumors to the contrary, Mr. Client recognizes he may now have an opportunity to benefit from a study (maybe he read this blog post).

Mr. Client hires an expert (GMG for example), who identifies 20% ($700,000) of components that should have been allocated to 5-year life instead of 39 years. Mr. Client jumps for joy when he realizes the IRS will allow him to “catch up” $700,000 of missed accelerated depreciation on his next tax return!

Why doesn’t every building owner and CPA know this?

The answer is simple; it is not their area of expertise. Although some building owners and CPAs have substantial experience with Cost Segregation, most do not. There is a dearth of true educators in this field, which unfortunately leads to much misinformation. These factors have caused countless thousands of building owners to miss out on this powerful tax savings strategy.

All is not lost!

If you own a building and have not had a Cost Segregation study performed, you have not missed the boat. Hundreds of thousands, or even millions, of dollars in tax savings may be available to you. Now that you are aware, let’s see how much you qualify for!  Contact Us today for more information.

* Full Link: http://www.irs.gov/Businesses/Cost-Segregation-ATG-Chapter-6-2-Change-in-Accounting-Method

Specialized Tax Incentives for the Hotel & Motel Industry

Hotel owners have three major tax incentives available to them, yet most are not taking advantage and consequently losing money. The main three programs that most in this industry are missing out on are:

1) Engineering-based Property Cost Allocation
2) Energy EPAct / 179d
3) Property Tax Reduction

Engineering-based Cost Allocation

Engineering-based cost allocation identifies opportunities for federal, and in some cases, state tax advantages to owners of commercial industrial real estate by accelerating the depreciation on their property. As an expert in this field, we have performed several hundred studies for large and small hotels across the U.S.

Taxpayers are typically correct in depreciating personal property such as equipment and furniture over five or seven years, but they often neglect available federal and state tax benefits by erroneously depreciating their entire investment in constructing or acquiring a building over 39 years. To do this correctly, one must hire an experienced engineer with a thorough understanding of construction finance.  The engineer will review all blueprints, architectural drawings, and electrical plans to isolate structural and mechanical components from those that are considered personal property in addition to identifying architectural and engineering fees that can be segregated.  The resulting cost allocation report will allow a taxpayer to:

  • Adjust the timing of deductions thus maximizing tax savings
  • Create a complete audit trail to resolve any IRS inquiries
  • Capture immediate retroactive savings on qualifying properties
  • Reduce real estate tax liabilities significantly

Energy EPAct / 179d

The second program often missed by those in this Industry is Energy EPAct / 179d. This is a federal deduction available for energy efficiency items placed in service after January 1, 2006. If you upgraded lighting, HVAC, or any part of the building envelope with energy efficient items you are likely eligible for a deduction of up to $1.80 per square foot.

We recently completed a project on a 65,000 square foot Holiday Inn Express and were able to assist in capturing $1.20 per square foot. This resulted in a $78,000 federal deduction for the owner of the property!

Property Tax Reduction

Probably the most frustrating bill that comes each year (or in some cases, twice each year) is the property tax bill. As of this writing, our studies indicate the average Hotel in the United States is being overcharged by 15% on their property taxes. There are many reasons Hotels are overcharged but mainly it is the result of improper assessments by the municipality. If you are a Hotel owner and are paying property taxes over $50,000 per year, you should have a review completed on your facility. Reductions in this area are direct to your bottom line!

 

If you have not had a thorough review on your facility, especially as it relates to the areas of Property Cost Allocation, Energy EPAct, and Property Tax Reduction, you are likely losing money that should remain in your pocket.

Building, Purchasing or Renovating a Hotel or Motel? Read This First!

If you haven’t heard, property Cost Allocation (aka Cost Segregation) is back with a vengeance!

A cost segregation study is an essential fiduciary component when building, purchasing or renovating a hotel or motel.  Hotel owners and operators who do not work with a qualified expert to perform a cost segregation analysis will fail to take advantage of significant tax benefits!

What Benefits?

Cost Segregation is an engineering based tax analysis in which certain non-structural components of a building are broken out and allocated to a shorter life class thus depreciating them at an accelerated rate.  This process reduces a taxpayer’s federal and state taxable income.

Examples of personal property for hotels would include:  carpeting, most other flooring, decorative lighting, cabinetry, dedicated electrical and plumbing systems, power generators, security systems, wifi/internet cabling, parking lots, curbs, sidewalks, landscaping, fountains and more.

All hotels and motels have substantial areas requiring daily maintenance and frequent updating due to use.  For example entries, lobbies and hallways are notorious for having carpeting and flooring commonly replaced every 3 to 4 years.  Most depreciation schedules will reflect all assets being depreciated over 39 years because this is the simplest way, however not the method that provides the most befit to the owner or operator nor is it tax compliant.

Cost Segregation fixes this problem because it applies MACRS to those short life assets thus accelerating the depreciation and reducing the owner or operators income tax burden.  What is the benefit?

  • New purchase or construction will result in increased cash flow in the first 6 years
  • Owned for 5 or more years qualifies for all unrealized depreciation carried forward into the current tax year
  • Purchased or constructed from January 1, 1987 – all improvements and renovations will qualify based on individual completion dates

In most cases the ROI for hotel and motel owners engaging in cost segregation is very high.  Typically they can see a 200% return on investment.  The standard fee that a hotel or motel owner can expect to see when engaging a cost segregation firm should be between ten and twenty thousand dollars per building.  The fee is dependent on several factors:  size of property, quality of construction, location, availability of construction documents, closing statements and more.

In summary, a Cost Segregation Study performed on a hotel or motel can provide significant immediate and long-term tax savings. Even properties purchased years ago can capture benefit.  Any hotel or motel whether purchased, constructed or renovated costing in excess of $500,000 should consider this service.