Case Study — Hotel

Hotels will vary based on the size of the parking a lot, the level of decorative features in the lobby and guest rooms, whether the hotel includes a restaurant with full kitchen and whether the hotel is an extended stay hotel where guest rooms include kitchens.  Most hotels will own the land improvements surrounding the building itself.  The land improvements that qualify for accelerated depreciation include, but are not limited to; some excavation, storm water systems, asphalt, concrete curbs and sidewalks, concrete dumpster pad, dumpster enclosure, swimming pool (both indoor and outdoor), parking lot lighting/dedicated electrical, landscaping, irrigation and pylon or brick façade signage.  Other land improvements may include fencing, concrete bollards, exterior decorative lighting, tennis courts, other recreation areas and  brick or concrete canopies at the front of the hotel.  Brick or concrete canopies will qualify based upon construction and how they are attached or un-attached to the hotel.  The interior of most hotels will include certain millwork, decorative lighting/dedicated electrical work, dedicated electrical to office equipment, lobby reception desks/counters/cabinetry, certain interior signage,  dedicated plumbing work to laundry equipment, communications/data systems, intercom systems, floor coverings and wall coverings.  Some hotels will also include survelience systems, equipment and plumbing related to pools/hot tubs, dedicated electrical/plumbing/gas lines related to hotel kitchens, dedicated electrical and plumbing related to guest room kitchens, cabinetry and countertops in guest room kitchens and additional decorative millwork in the guest rooms.  The best method for identifying all qualified property is the use of a cost segregation study where an engineer and CPA work together to identify and classify all qualified property.

Please note that qualified property, land improvements and personal property are terms used to describe costs in the  real estate that can be written off more quickly for tax purposes.

Hotel Example

• Cost of Property (Excluding land): $4,800,000
• Constructed and placed in service in 2005
  

In this case study done for tax year 2006, the hotel had a total cost of $4,800,000, not including land. Through cost segregation analysis, the owner was able to re-classify 25% of the total costs to either 5 or 7 year property and 10% of the total costs to 15 year property. This resulted in a Net Present Value After Tax Benefit of over $324,000. The additional depreciation in the first year of the study was approximately $631,000.

The tax savings in the first year assuming a tax rate of 39% was over $245,000.

*Net Present Value is a calculation that shows the combined benefits of a cost segregation study over the remaining tax life of the property. The combined benefits each year are adjusted back to today's dollars using a 7% discount factor. This allows our clients to compare the total benefits in today's dollars to the fee of our services.