NATIONAL REPORT—There are a large number of new and updated tax incentives available to hotel owners. These benefits take the shape of conventional tax incentives, such as cost segregation, as well as incentives encouraging the saving of energy, like the alternative energy credits and the proposed extension of Section 179D, Energy Efficient Commercial Buildings Tax Deduction. If used in conjunction, these tax incentives can assist in reducing the cost of hotel ownership.
Cost Segregation
Cost segregation is a method of accounting that allows for hotel owners to take advantage of the time value of money. Normally, building property is depreciated over 39 years, meaning owners are able to take an annual 1/39th tax deduction of an item’s cost over each of the 39 years. Cost segregation allows hotel owners to categorize some building property along faster depreciation schedules, such as personal property (5- or 7-year), land improvements (15 year) or soft costs (distributed evenly across all categories). This allows an owner to realize these deductions faster and take advantage of the added Net Present Value (NPVs) created by shorter depreciation schedules.
Typical hotel items that are categorized for faster depreciation as 5- or 7-year personal property would be carpets, appliances, décor, furniture, shelving, washer/dryers, wiring and plumbing connected to appliances and machinery, etc.
Typical items defined as land improvements, which can be depreciated over 15 years, would be excavation of the site, exterior light posts, fencing, paving, and outdoor areas such as tennis courts, swimming pools, and basketball courts.
Soft Costs include the architectural and engineering costs, blueprints, construction labor, insurance, job site security, permits, testing, and other fees.
The items that remain as 39-year building property are building lighting, HVAC, roofs, walls, windows, etc.
New HVAC Regulations
The IRS recently issued new permanent regulations (TD 9636) which determine the treatment of purchases related to capital and repair. By further categorizing building system costs into the following sub-categories, building owners can reduce the costs of repairs to equipment that occur in the future. These new sub-categories are: HVAC, plumbing, electrical, escalators, elevators, fire protection & alarms, security systems, gas distribution, and all other.
These sub-categories enable hotel owners to determine which costs are eligible for special treatment as abandoned property or replaced equipment, allowing large tax deductions for existing equipment if replacements arise in the future.
Alternative Energy Credits
Recently, hotels have been embracing sustainable initiatives. In addition to the continual operational cost-cutting from energy savings, there has been a growing demand for hotels that embrace alternative energy generating technologies. The alternative energy tax credit, depending on the technology, can return 10 to 30 percent of the equipment and installation’s cost as a tax credit. This allows a significant improvement in the payback period for installing these projects, which then enable the hotel to save on the continued energy costs as well as attract sustainability minded customers. Common technologies eligible for the benefit include solar photovoltaic, geothermal, combined heat and power, and wind.
EPAct 179D Tax Deductions
Another accelerated depreciation benefit, if extended by Congress, comes in the form of the EPAct Section 179D tax deduction for energy efficient implementations. According to the Energy Policy Act of 2005, Section 179D, hotel owners can be eligible for up to a $1.80/sq.ft. EPAct tax deduction for energy efficient investments in the following building subsystems: interior lighting, HVAC, and building envelope (walls, windows, roofs, doors).
If a building does not meet the efficiency requirements to trigger the full $1.80/sq.ft. tax deduction, each category can instead be eligible for a $0.60/sq.ft. tax deduction.
Many hotel owners have found success using the benefit to reduce the payback period for a range of technologies. Hotels that have installed high-end technology, such as LEDs, Variable refrigerant volume/flow (VRV/VRF) and geothermal heat pump systems routinely trigger the benefit, all while cutting operational energy costs. However, efficient fluorescent lighting and traditional central HVAC systems, such as chillers, are able to trigger the benefit as well.
One of the biggest avoidable energy usages in hotels are lights and HVAC left on while a room is unoccupied. The solution to this unnecessary energy usage is occupancy sensors for lighting and HVAC, switching off these systems after no movement has been detected for a certain period of time. These sensors are eligible costs to be applied to the EPAct lighting benefit, and all remaining control costs not depreciated through the tax deduction can then be treated as personal property and depreciated over five years. This is a good example of how the energy efficiency tax deduction and cost segregation can combine to create large savings. By combining a cost segregation study with the EPAct 179D tax incentive, a portion of the depreciable basis can be eliminated.
Conclusion
With the new tax incentives available for HVAC repairs and energy efficient installations, now more than ever is the time for hotel owners to take advantage of a cost segregation study or energy efficiency upgrade. By conducting these studies with a professional, both the current and long term benefits can be realized.
Charles R. Goulding Attorney/CPA is the President of Energy Tax Savers, an interdisciplinary tax and engineering firm that specializes in EPAct 179D tax credits. Daniel Audette is an Engineer with Energy Tax Savers. Jacob Goldman is a Senior Tax/Engineering Consultant with Energy Tax Savers.
