Hotel Developer Realizes Large Tax Savings with Depreciation Recovery Study

CLIENT SUCCESS STORY

Limited Service Hotel Developer recovers over $3 million in unclaimed depreciation with the help of Paragon’s Cost Segregation Depreciation Recovery Study.

Background

A southeastern hotel owner/developer had acquired, renovated, or built 18 limited service hotels over many years. To help fund additional investments, he was seeking to improve the return on investment (ROI) and cash flow on his existing properties.

Challenge

Two locations had been acquired and went through extensive renovations. The other two were ground up construction. The accounting firm had classified costs the best they could. Unfortunately, they weren’t familiar with  Internal Revenue Service (IRS) Procedure (2007-16) that addresses the issue of taxpayers who have claimed less depreciation than what they were entitled to claim. 

The total cost classified as “building” with a 39-year straight-line depreciation was about $18 million. The developer was unaware of the benefits of cost segregation and a fixed asset depreciation recovery study. He didn’t realize that he could accelerate some of the tax depreciation, enabling him to reduce his tax liability and increase cash flow.

Solution

After hearing Paragon’s fixed asset experts speak at a lodging conference, the developer decided to do a pilot Cost Segregation Depreciation Recovery Study of four locations for comparison purposes.

Over 17% of the $18 million was reclassified to “5-year double declining balance” property. In addition, Paragon’s Fixed Asset Retirement Study identified $1.6 million that was as disposed of during renovations, but never written off and removed from the books. The net book value of those disposed components was about $1 million.

The owner/developer engaged Paragon to perform further Cost Segregation studies on its remaining properties, significanty increasing his tax savings and cash flow well beyond his expectations.

Results

That year, the additional deduction completely offset the taxable income and no tax was due! The unused balance was carried back to the prior year and a refund check followed.