Now that we are well beyond the difficulties of the Covid-19 pandemic, hotel brands are once again starting to push on the hotel owners to make improvements to their buildings. Are the PIPs (property improvement plans) still in place? Since many hotels didn’t have many customers for a while during the long duration of the pandemic, their furnishings as well as other items such as carpets and bathrooms may not have seen the wear and tear that they would have. Consequently, plans to change those out have been pushed out. But the time is soon coming to make those improvements.
With all the new hotels that continue to be built, having a hotel that looks dated both in terms of the interior finishes as well as the furnishings is going to be a detriment to business success. Hotel News Now has an excellent article on the ongoing PIP discussions hotel owners are having with the brands they represent.
This is also a reminder that when hotels are doing these renovations that they should also be looking at doing a partial asset disposition study (PAD). These are done when the renovations are more than $100,000 which nearly every renovation of a hotel will certainly hit. Partial asset disposition allows for the owner to take a tax deduction in the year in which the renovation was done. It’s a use it or lose it tax deduction. Since you are putting new material into your building and throwing out the old, we do the calculations as to what you are throwing out. There is basis that is still on your books and with our study, you can deduct that off your books since you’ve removed it from the building. Not only do you get a tax deduction but since it’s off your books, you don’t have to pay recapture tax on it when you go to sell the building.
Every project varies depending upon the kind of work done and how long you’ve own the building, but it’s reasonable to expect that you might see a tax deduction of 15-20% of the improvement amount. So for example, let’s stay you are planning a $500,000 improvement. By studying that work effort and doing a partial asset disposition, PAD, you might see a $75,000 – $100,000 +/- deduction that year on your taxes. If you are paying 32% Federal tax rate, that’s $24,000 – $32,000 in tax savings. These studies tend not to cost much. If you have already done a cost segregation study on your building then this might only cost you another $3,000 – $5,000 to do. That cost is an expense of course. If you need to do cost segregation, that will increase the overall cost for as you’ll have to do a cost segregation study but a cost seg study will likely yield another massive tax deduction for you in addition to what is noted above.
If you own a hotel and you are planning to do renovations and would like to discuss, please give me a call. If you did renovations in 2022 and have filed an extended tax return, there is still time to do a partial asset disposition and take advantage of this great tax deduction. Once you’ve filed your taxes for the year in which the work was done, you cannot amend to go back and take this deduction. It truly is use it or lose it. Most lose it because they are not aware of this. I work all over the U.S. and can help you on a project anywhere in all 50 states in the U.S. John Murphy 864-276-1448.
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