The Internal Revenue Service (IRS) released the tangible property regulations in 2014, which substantially changed the tax rules for how tangible property gets capitalized versus expensed. One significant concept that came from these regulations is the ability for owners of hotels or other types of real estate to claim tax deductions for the replacement of certain building components.
Under the tangible property regulations, a building is considered a “unit of property,” which is further broken down into its structure, systems, and major components. Examples of building structures are the foundation, roof, walls, partitions, floors, windows, ceilings, and permanent coverings. Building systems include the HVAC, elevators, escalators, and items used for plumbing, electrical, , fire protection, security, and gas distribution. A major component of the building is defined as a part or combination of parts that performs a discreet and critical function in the operation of the building’s structure (e.g. HVAC system, furnaces, air conditioners, etc.).
When a piece of the building structure, a system, or a component is replaced, a portion of the original building cost can be written off and deducted as a partial asset disposition. A common example is if the cost of a new roof is capitalized, the cost of the old roof, net of any accumulated depreciation, can be deducted. In addition to getting a tax deduction for disposing the old roof, the tangible property regulations allow the owner to expense any costs to remove the old roof. If the cost of the old structure, system, or component is unknown, a reasonable method must be used for assigning a cost and a pro-rated portion of the accumulated depreciation from the building.
There are opportunities for owners of hotels and other real estate to take advantage of tax deductions that stem from replacing a component or system of their building. Hiring a professional to prepare a cost segregation of the property can be beneficial as it would assist in breaking out the components of the property for purposes of applying these regulations. A tax professional can further assist with determining what tax opportunities can be taken advantage from this as well as other areas of the tangible property regulations.
Our tax specialists are available for consultation on this and other business management matters for restaurants, hotels, or food distributors. Please contact Aaron Boker or one of our hospitality tax advisors at 301.231.6200 for more information.