U.S. tax codes require expensing assets such as vehicles, office equipment, and buildings over their designated recovery period. Depreciation accounts for wear and tear on an asset and reduces the asset’s value over time. Depreciation is a non-cash expense, which means money was not spent to create the deduction. To someone who owns commercial property, including hotels, depreciation is a huge benefit because it reduces their taxable income.
Generally, on a depreciation schedule, hotels are set up to depreciate over 39 years. However, separating the structural and non-structural components of a building and accelerating the depreciation lives of the non-structural components through a cost segregation study can result in significant tax savings.
The Role of Non-Structural Hotel Components in Cost Segregation
Structural components include the building’s roof, walls, and foundation, which depreciate over 39 years. Non-structural components can be depreciated over five years and include carpeting, molding, window coverings, security systems, and more. Property improvements like curbing, paving, and striping can also be segregated and depreciated over 15 years.
Hotels have many non-structural components that can be reclassified into shorter depreciable lives. Failing to separate these components properly can result in missed tax savings. Having a cost segregation study done on a hotel can help property owners realize these tax savings.
Since 1999, cost segregation studies have been recognized as an accepted method of accelerating the depreciation of property. By reclassifying a portion of the building’s assets as business use, the cost segregation study lowers the property owner’s income tax liability, thereby increasing cash flow. The average savings to the hotel owner from a cost segregation study is between $50,000 and $70,000 per $1,000,000 of building cost. These savings can be used to invest in the business, pay off debt, or, however, they see fit; it is their money.
Don’t Overlook Significant Savings as a Hotel Owner
Cost Segregation studies have the potential to provide significant financial benefits to hotel owners, which are most likely overlooked. With proper guidance from a reputable cost segregation provider, hotel owners can even take advantage of greater expensing of repairs and improvements under the 2014 Tangible Property Regulations. If you have questions, CSSI® can provide answers.