NEWH - November 2005 - (Page 20)

Opinion hospitality industry finds friend in IRS by Julio P. Gonzanlez & Rosemary DiModica They are taking advantage of the significant tax benefits from accelerated depreciation deductions for commercial properties supported by more than 200 court cases, Treasury regulations and IRS revenue rulings. Typically, 25 percent to 40 percent of the assets within a property can be reclassified. Depending on the type of property, this percentage can be even higher. In addition, businesses might enjoy state and local real estate tax savings from the cost segregation study as well as lower property insurance premiums. The process of identifying assets within a commercial property for the purpose of accelerating depreciation has been around for many years. Cost segregation studies are the IRS-sanctioned techniques allowing resort owners to accelerate depreciation on their facilities. According to the IRS guidelines, a properly performed cost segregation study is based on a detailed engineering analysis. Courts have been ruling in favor of this tax strategy since 1959 (Shainberg vs. Commissioner). Whether it was referred to as investment tax credit (ITC) or component depreciation, the primary objective has always been increased cash flow. The analysis involves a thorough review of engineering and architectural documents, as well as an onsite inspection of the property. These studies allow businesses to get the most out of their facility and maximize tax benefits available to increase cash flow. This allows owners to free up operating cash to fund income-producing activities. In 1997, the U.S. Tax Court ruled in favor of the Hospital Corp. of America (HCA vs. Commissioner), providing a landmark decision for cost segregation. By recovering costs over a shorter period of time, businesses can enjoy substantial tax savings. As a general rule, for every $1 million of 39-year property reclassified as seven-year property, the present value of the net cash flow will be about $300,000. 20 The court ruled that assets qualifying as personal property under the old ITC rules also qualify as such for federal income tax purposes. Hundreds of court cases and revenue rulings support this. Although a cost segregation study can be performed at any time, it is best to have one completed for the year the building or improvements are placed in service. Resort owners are also allowed to catch up on the depreciation that should have been taken in previous years. This catch-up is known as a 481(a) adjustment. The IRS now allows 481(a) adjustments to be claimed entirely in the first year, as opposed to the previous ruling, which required the taxpayer to spread the catch-up over a four-year period. The cost of a study depends on availability of data and the complexity of the project. The estimated economic benefits are often 10 to 20 times the cost of the study. An owner can also benefit from these tax laws prior to building a new facility. Pre-construction tax planning can ultimately be used to maximize the benefits of a cost segregation study by identifying elements of a building that can be designed to qualify for accelerated depreciation. As year-end tax planning begins, many tax benefits are missed and overlooked. A cost segregation study for resort owners could be the best tax advantage most often overlooked. Consideration of such a study could be the biggest friend for the savvy business owner. Ojai Valley Inn & Spa Photos courtesy of Cheryl Rowley Design, Photographer - David Phelps Cost segregation studies can boost depreciation and cut taxes. Many resort operators and owners are improving cash flow and finding immediate tax savings from their business properties. They are finding these benefits from an unexpected source: the Internal Revenue Service.

Table of Contents for the Digital Edition of NEWH - November 2005

NEWH - November 2005
Letter from the President
Upfront
Contents
Hospitality News
Learning from Las Vegas, Exposing the Masters
Concept Hotels
Hospitality Industry Finds Friend in IRS
Mof Mof – Minimum of Fuss, Maximum of Flavor
Bubble Bash a Great Success!!
Niagara Fallsview Casino Resort
NEWH Welcomes New Corporate Partner NLP Industries
School from the Heart Update
Contributors
Coming Events

NEWH - November 2005