The Hotel Industry is unique in that like a commercial product, a Hotel follows a definite life cycle. If a Hotel Owner does not keep this in mind, their facility can quickly become worn out and dated in comparison to their competition. To stay competitive, Owners must acknowledge that there will be constant new brand competition. A newer, swankier hotel that offers the latest amenities to its guests will quickly put an outdated hotel out of business. This fact leaves few options of staying competitive for a Hotel Owner. The most prominent option would be to rebrand. What does “rebranding” entail?

Rebranding can be a broad term ranging from a simple revamping of a logo but more often is a much larger undertaking with the ultimate goal of retaining guest loyalty and awareness. Rebranding is especially important today because of major social, environmental and technological changes that have taken place over the past five to ten years. For example, just a few years ago wifi throughout a hotel was rare, flat screen televisions were a novelty, the expectation of a hot breakfast almost unheard of, and eco-friendly was a word most people were unfamiliar with. All of those ideals have changed, and are now an expectation for most travelers. This new expectation has forced hotel brands to insist their franchises undertake multi-million dollar rebranding to live up to their flag.

What does this mean for Hotel Owners?

There is a little known opportunity for Hotel Owners that would directly affect the rebranding of their organization. The opportunity is Specialized Tax Incentives, specifically Engineering-based Property Cost Allocation, aka Cost Segregation; Property Tax Reductions; Bonus Depreciation; as well as various Energy-based Tax Credits.
Specialized tax credits are an essential fiduciary component when building, purchasing or renovating a hotel or motel. These credits affect rebranding and the constant renovation of non-structural components of their building such as:
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• Carpeting and flooring
• Wifi and Internet cabling
• Decorative lighting
• Parking lots
• Cabinetry
• Curbs and sidewalks
• Electrical and plumbing systems
• Landscaping
• Power generators
• Fountains
• Security systems
• And many more....

A Cost Segregation Study is an engineering-based tax analysis in which these types of components are broken out and allocated to a shorter life class, depreciating them at an accelerated rate. This means a building purchased, constructed or renovated since January 1, 1987 and costing in excess of $500,000 should have all improvements and renovations qualifying based on their individual completion dates. So, every Hotel having performed renovations through rebranding within that time frame have a potential benefit sitting on the take just waiting to be captured.

To determine if your facility could capture a benefit, simply contact David Ross & Associates at 678-654-9500 and ask for a basic calculation, performed at no charge.

David Ross & Associates, Business Advisors
Phone 678-654-9500 • Web davidrossandassociates.com • Email david@davidrossandassociates.com

This article is available as a printable PDF here.

Many automobile dealerships implement significant renovations as the industry morphs due to technology changes and as manufacturers rebrand.  The goal of the renovations are, of course, to improve top line performance (sales).

Top line goals can effectively be achieved more quickly by capitalizing on the tax benefits associated with the renovations; for instance, it’s not uncommon for $1MM in renovations to conservatively equate to a $60,000 tax related improvement in the bottom line. Given a 10% profit margin, that equates to a $600,000 increase in top line results.
What Tax Benefits?

Tax benefits associated with construction costs can be procured through an Engineering Based Cost Segregation Study. This Study applies tax compliant depreciation time-lines to certain non-structural components. For instance, instead of depreciating carpeting over 39 years as if it were a structural item, it would be depreciated in five years. Many other non-structural building components can be depreciated in 5, 7 and 15 years versus 39 years.

Furthermore, the tax benefits of properly depreciating current renovations can apply to the entire existing facility, including past renovations.

So, here are the benefits of reducing Federal and State taxable income by safely ‘accelerating’  depreciation on certain building components with a rigorous Study:

• New renovation, 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.

From our experience, its not uncommon to document as much as $200,000 in accelerated depreciation per $1MM worth of building; assuming a 35% tax rate, the resultant reduction in taxable income would translate to a $70,000 bottom line improvement.

A project fee for a Study is typically between $10,000 and $20,000 per building, and can depend on property size, construction quality, location, availability of accurate construction documents, other.

So, a $2MM building could provide a $140,000 bottom line improvement; that’s about a 10:1 benefit-to-cost ratio for performing the Study (…and that’s not considering the net cost basis of the Study after writing it off as a business expense!).
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In summary, cost segregation analysis is a logical tax strategy dating back to 1959 when the Tax Court first allowed component-based depreciation of buildings (though greatly clarified over the past decade with the IRS’s Audit And Technique Guidelines). Even properties purchased years ago can capture benefit with a very attractive cost-to-benefit ratio for performing an Engineering Based Cost Segregation Study. Any auto dealership whether purchased, constructed or renovated for costs in excess of $500,000 should consider this service.

This article originally appeared on the GMG Savings website.