CASE STUDY: HOTELS
Cost Segregation Studies on hotels present a great opportunity to benefit from accelerated depreciation due to the nature of the hospitality industry. An article from Hotel & Motel Management states, "There are few better ways to create a higher level of positive cash flow in the initial years of an investment than a cost segregation study. By undertaking cost segregation studies, hotel owners can create a competitive advantage in a tight market by increasing their buying power. They also can renovate more extensively because of the resulting short-term positive cash flow."
The following list contains examples of decorative finishes, mechanical support and land improvements that may qualify as personal property depending on each item's functionality, thereby allowing accelerated depreciation:
- Decorative Finishes: Millwork, Wall coverings, Floor coverings, Demountable partitions, Window treatments, Decorative lighting
- Mechanical Support
- Electrical: Transformers, Distribution panels, Communication systems, High voltage switch gear, Hospitality fixtures, Computer outlets and data jacks, TV outlets and jacks, Hair dryer and misc. outlets, Emergency power & lighting systems, Computer data ports/networking and their power systems, Flex space and demountable power systems, Audiovisual conferencing capability systems, Security access and monitoring systems, Conduit and wiring servicing the equipment
- Plumbing: Sinks, Drains, Emergency fixtures, Waste interceptors, Break room/coffee station fixtures, supply and waste piping systems, Cafeteria and kitchen fixtures, supply and waste piping systems, Specialty gas, vacuum and compressed air piping systems, Shower and deluge fixtures, supply and waste systems
- HVAC: Special supply and exhaust systems for kitchens, Removable HVAC systems, Special humidity and temperature control systems for computer and telecommunications equipment, Specialized computer room fire protection systems integral with the HVAC system, Specialized air sensing and filtration systems
- Land Improvements: Sidewalks and curbing, Landscaping, Parking lots and paving, Fencing, Site utilities, Sewer and drainage systems, Swimming pool Outdoor lighting
The following illustrates the actual tax benefits of a Cost Segregation Study that was completed on a hotel:
Value: $2.5MM (excluding land)
Placed in Service: New Construction in 2001
Increased Depreciation for the Year of the Cost Segregation Study: $421,211
Estimated Reduction in Taxes Paid in First Year: $147,424
Net Present Value of Cost Segregation Study: $82,726
As you can see, the benefits are quite dramatic in this example, mainly due to the "catch-up" depreciation allowed by the IRS. Accordingly, all depreciation missed from 2001 - 2005 was brought forward to the current year and was fully depreciable without filing an amended tax return. Better yet, our client was able to realize the benefits of our Cost Segregation Study immediately because he was able to suspend making his quarterly estimated tax payments.