Increased cash flow and return on investment – two key concerns if you’re a hotel buyer or investor. Here are some strategies for tax savings that you can employ to reduce income taxes, increase cash flow and accelerate your return on investment.
Allocation of Purchase Price
Buyers of hotels must allocate the purchase price between tangible assets such as non-depreciable land and artwork, and depreciable assets such as:
- Buildings
- Land improvements
- Porte-cochères and canopies
- Fixed mechanical/electrical equipment
- Audio/Visual equipment
- Kitchen/Restaurant/Bar equipment and furniture
- Fitness center equipment
- Swimming pool pumps and filtering equipment
- Security systems
- Telephone and radio communications systems
- Computer wired and wireless networks
- Guestroom/lobby/back office furniture and fixtures
- Ballroom and meeting rooms furniture
- Other personal property assets
- Expendables
Sounds easy enough, right? Well, there are regulatory and tax requirements you must follow.
The allocation must be based upon the appraised Fair Value or Market Value In Use of all the assets acquired, balanced to the final purchase price. Proper determination of Fair Values satisfies stringent financial reporting and audit regulations. It also establishes a supportable basis for internal book depreciation.
Additionally, the allocation must be based upon an engineering-based appraisal to determine Fair Market Value in Use of acquired assets complies with allocation of purchase price requirements. This approach optimizes federal and state income tax depreciation, which is deducted from taxable income, thereby reducing income taxes and increasing cash flow.
Keep in mind that third party independent experts are required to determine the Fair Value of all acquired assets for audit and tax compliance. This is not something you can do internally.
Immediate Fixed Asset Cash Flow Benefits
Need a faster ROI and more cash flow to pay back loans or reinvest in the property with renovations? Under the Tax Cuts and Jobs Act of 2017 (TCJA), you can realize a quicker recovery of your hotel purchase with immediate tax savings from 100% bonus depreciation deductions. Here are example savings for different types of hotel properties and investments:
|
HOTEL TYPE |
PURCHASE PRICE | PERSONAL PROPERTY | TAXES SAVED |
| FULL SERVICE | $ 20,000,000 | $ 5,000,000 | $1,700,000 |
| LIMITED SERVICE | $ 5,000,000 | $ 1,000,000 | $ 350,000 |
| RENOVATION | $ 50,000,000 | $25,000,000 | $8,600,000 |
| LUXURY – RESORT | $100,000,000 | $25,000,000 | $8,600,000 |
Retirement Studies for Renovations
Here’s another scenario: You’ve purchased the hotel property and you want to renovate it. The renovation generally involves removal of existing build out such as ceilings, floor finishes, light fixtures, ductwork, walls, wiring, plumbing, etc. The remaining tax basis can be written off if the acquisition price is properly valued and allocated to the removed components. This write off reduces income taxes, property taxes, and property insurance coverage – more opportunities for savings. A retirement study can identify qualifying assets, related write-offs, and potential tax savings.
Fixed Asset Experts
Want to explore this further? Contact Paragon to learn how you can increase cash flow, save taxes and accelerate the return on investment in your new hotel purchase.
