What is Cost Segregation?
Cost segregation is a tax reporting strategy which identifies and reclassifies certain assets to shorten the time for taxation purposes, allowing for a reduction in current income taxes.
The primary goal of a cost segregation study is to identify all construction-related costs that can be depreciated, or “written off”, over a shorter tax life (typically 5, 7 and 15 years) & separate those out from the hotel building itself (which, for commercial property like a hotel, has a tax life of 39 years).
So this cost segregation study helps you to accelerate the depreciation of your hotel building, thus allowing you to write off more on your tax return, reduce your income taxes & free up money for additional investment opportunities or current operating needs.
Further, recent tax law changes under the Tax Cuts and Jobs Act of 2017 (TCJA) have also given a boost to cost segregation. Bonus depreciation was increased from 50% to 100% on certain qualifying assets.
This means that, as a hotel property owner, you will receive immediate expensing, or “write off”, of certain 5, 7 & 15 year tax life property. The TCJA also allows used property that was acquired after Sept. 27, 2017 to qualify for this special depreciation treatment. A quality cost segregation study will separate out any costs that qualify under the new bonus depreciation rules.
How Does Cost Segregation Benefit Me & My Hotel Business?
Write off tax deductions much faster
Enhance cash flow {which can allow you to acquire more hotels or investment property faster}
Create Net Operating Loss {NOL} carry backs
And more cost saving benefits, depending upon your hotel building
How Does the Cost Segregation Process Work?
An engineering study is typically recommended on hotel buildings valued at $750,000 or more. This study evaluates your hotel, where an onsite visit occurs to identify & assess the various components of your hotel’s building structure.
Next, an offsite analysis occurs where these components are separated out & then sorted into categories where some can be written off faster on your tax return. This categorization is the key to what will allow you to reduce your tax bill.
“Cost segregation is one of the best & most powerful tax savings strategies available to hotel owners today”
— Bob Steward
When is the Best Time To Do Cost Segregation?
Because of the tax savings benefits that can occur from doing cost segregation on your hotel, any time is a great time to do a cost segregation study. There are also some optimal times to do the study & these include:
When new construction plans for your hotel have been finalized
When you are purchasing an existing hotel
While adding leasehold improvements {whether you are a lessee or lessor} to either an existing building or doing a buildout of a leased space
When the costs for remodeling your hotel have been finalized
In the crucial beginning years of operating your hotel, when the tax savings can help to increase your cash flow when you most need it
What Should I Do to Get Started with Cost Segregation?
Reach out to us to start a conversation & request a complimentary tax savings estimate for your hotel. We just need a few details about your hotel & then we can have a tax savings estimate right off to you so you can decide whether it makes the most sense for your hotel business.