Hotel and Restaurant Owners: Renovations Equal Tax Depreciation Deductions

November 22, 2017

As 2017’s tax year begins to wind down, hotel and restaurant owners will be able to take advantage of a variety of tax depreciation incentives. These tax deductions can be substantial if a hotel and restaurant owner purchases a high quantity of fixed assets, or if a major buildout or refurbishment project for their property is completed and placed into service before the end of this year. Below is a summary of the tax depreciation incentives available, which include deductions for several specific types of building improvements.

Fixed Assets: Section 179

To the extent hotel and restaurant owners have taxable income, Section 179 enables them to deduct the full cost of fixed assets acquired and placed into service; which includes machinery and equipment, point of sale systems, furniture, and fixtures, and qualified leasehold improvements. The deduction can be claimed for acquisitions of both new and used assets.

For 2017, up to $510,000 of Section 179 can be claimed on assets that are acquired and placed into service before the end of the year. The amount of Section 179 that can be claimed does get phased-out dollar-for-dollar if the total asset purchases exceed $2,030,000.

50% Bonus Depreciation

In 2017, 50% bonus depreciation enables business owners to deduct half the cost of a fixed asset in the year the asset is placed into service. Bonus depreciation is not contingent upon whether a taxpayer has taxable income and there is no limitation on the amount of bonus depreciation that can be claimed. Qualifying fixed assets must be brand new or original-use property and can include equipment, point of sales systems, furniture, fixtures, and certain types of improvement property.

Bonus depreciation deductions are tentatively scheduled to be reduced from 50% to 40% beginning in 2018.

Qualified Leasehold Improvements

Qualifying leasehold improvements are enhancements to a building space that meets all of the following criteria:

  • To an interior portion of a building
  • Nonresidential property
  • Pursuant to a lease
  • In service more than three years after the date the building was first placed into service

These types of improvements are depreciated over 15 years in comparison to typical commercial real estate property that’s depreciated over 39 years. Qualified leasehold improvements exclude enlargements, elevators/escalators and internal structural framework. Lessees are eligible to claim both Section 179 and bonus deprecation in the year the qualified leasehold improvements are placed into service.

Qualified Improvement Property

Qualified improvement property is similar to qualified leasehold improvement property except there is no requirement that the improvements be placed into service more than three years after the building is initially placed into service, and the improvements do not have to be pursuant to a lease. Bonus depreciation can be claimed for qualified improvement property.

Qualified Restaurant Property

Qualified restaurant property is any building or building improvements where 50 percent or more of the building’s square footage is devoted to preparation and seating for on-premises consumption of prepared meals. A building or building improvements that meets the criteria of restaurant property is depreciated over 15 years compared to 39 years and is eligible for Section 179 depreciation. The qualified restaurant property could also be eligible for 50% bonus depreciation if it also meets the criteria of qualified improvement property.

As hotels and restaurant owners conduct year-end tax planning, tax depreciation incentives for asset purchases or renovation projects should be considered. There are major tax deductions that can be used to substantially reduce an owner’s corporate or personal tax liability. Hotel and restaurant owners that have completed, or will complete a major renovation project in 2017 should review their buildout costs with a tax advisor before the end of the year to determine if they are eligible for tax deductions.

Aronson LLC is available for consultation on this and other business management topics for hotels and restaurants. Please contact Aaron M. Boker, CPA at 240.364.2582 or for more information.