Tag Archives: depreciation

Tangible Property Regulations Present Tax Savings Opportunities for Hotel, Restaurant, and Food Distribution Owners

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In 2014, the IRS issued guidance, which over the last several years has made a significant impact on how hotel, restaurant, and food distribution owners capitalize and depreciate assets placed into service. Effective for tax years beginning January 1, 2014, the tangible property regulations regulate the treatment of normal repairs and maintenance versus an improvement to an asset. The regulations also clarify whether fixed asset additions must be capitalized or expensed immediately.

Wondering how this applies to your business, and if you need to make changes to take advantage of potential savings? Find out below.

What must be implemented?

All taxpayers that have depreciable fixed assets must have a capitalization policy that determines the threshold under which a fixed asset or an improvement to a unit of property is to be capitalized and depreciated. Under the new regulations, the IRS will allow a business without audited financial statements to have a “safe harbor” threshold of $2,500 per unit of property and $5,000 per unit of property for business owners with audited financial statements. While taxpayers are allowed to use higher capitalization thresholds, the taxpayer must be able to justify using a threshold above the allowed safe harbor amount in the event of an audit.

What is considered an “improvement to a unit of property”?

Business owners must make the distinction between routine maintenance and an improvement to a specific asset or unit of property. Improvements to a unit of property that must be capitalized and depreciated over its useful life are defined as betterments, a restoration to an original state, or an adaptation to a new use. Examples of a unit of property can include the building, HVAC system, and electrical system. Common improvements for hotel and restaurant owners could include expanding the hotel building or a restaurant conducting renovations to the inside of the building space used for restaurant operations.

What is considered routine maintenance?

Routine maintenance may be written off if the action will be completed more than once over a ten-year period. This could include hotel owners putting down new asphalt in the hotel’s parking lot every five years or restaurant owners replacing the floor titles of their restaurant every few years.

Can you deduct materials and supplies?

Under the regulations, there is a set de minimis of $200 or a useful life of 12 months or less that can be expensed immediately upon purchase. This allows hotel, restaurant, and food distribution owners to immediately expense items such as bed linens, glassware, tablecloth linens, utensils, and manufacturing supplies.

What are the opportunities under the regulations?

The regulations require great diligence in both year-end tax planning and tax return preparation, but do allow for substantial tax savings techniques for hotel, restaurant, and food distribution owners. Accelerated deductions of asset additions could be obtained under the tangible property regulations. If a unit of property such as a HVAC system or electrical system is placed in service and it replaces an old system, the business owner may be able to write off the old HVAC or electrical system that was replaced.

Each year, business owners should review their fixed asset purchases to determine if there are any additions that can be directly expensed or if there are any prior fixed assets additions that can be disposed of. Please reach out to us if you have any questions or would like more information on the tangible property regulations and the impact it can have for a restaurant, hotel, food distributor, or company that services the hospitality industry.

Aronson LLC is available for consultation on tax and business management topics. Please contact Aaron M. Boker, CPA at 240.364.2582 or aboker@aronsonllc.com for more information.

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2013 Tax Depreciation Deductions for Hospitality Owners

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The “American Taxpayer Relief Act of 2012” reinstated a variety of favorable tax deductions for assets placed in service through December 31, 2013. These tax incentives are valuable for hospitality owners and are not just limited to fixed assets; improvements to buildings and the costs of buildings meeting either the qualified leasehold improvements or qualified restaurant property criteria could be eligible for these advantageous deductions, but you must act quick to take advantage of them.

Below is a summary of the first-year depreciation deductions hospitality owners can take advantage of between now and December 31st 2013, and what the tax law changes are expected to be effective January 1st 2014:

Section 179

Section 179 enables business owners to deduct the full cost of fixed assets acquired and placed into service, including equipment, computers, vehicles, furniture, and fixtures, but excluding real property and most improvements. The deduction can be claimed for acquisitions of both new and used assets.

  • 2013 Tax Law | Up to $500,000 of fixed assets acquired are eligible for the immediate deduction. The amount of Section 179 that can be claimed begins to phase out when $2,000,000 or more fixed assets are placed into service.
  • 2014 Tax Law | Only $25,000 of depreciable assets acquired are eligible for the immediate deduction. The amount of Section 179 that can be claimed begins to phase out when $200,000 or more fixed assets are placed into service.

50% Bonus Depreciation

50% bonus depreciation enables business owners to deduct half the cost of a fixed asset acquired and placed into service. Qualifying fixed assets must be brand new and may include equipment, computers, vehicles, furniture, fixtures, and qualified leasehold improvements.

Qualified Leasehold Improvements

A qualified leasehold improvement is any improvement meeting all criteria below:

  • 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
  • 2013 Tax Law | Fifty percent bonus depreciation can be claimed on all qualifying leasehold improvements acquired and placed into service after December 31, 2013 and before January 1, 2014. There is no limitation on the amount of bonus depreciation that can be claimed. Up to $250,000 of Section 179 can also be claimed. Any cost basis that remains is depreciated over 15 years.
  • 2014 Tax Law | Bonus depreciation is repealed and Section 179 cannot be claimed on qualified leasehold improvements. All leasehold improvements are depreciated over 39 years.

Qualified Restaurant Property

Qualified restaurant property is a building or improvements to a building where 50% of the building’s square footage is devoted to the preparation of, and seating for, on-premises consumption of prepared meals. Even if a restaurant is operating in a portion of a building or a space in a shopping center, it’s 50% of the entire building that must be devoted to the restaurant’s use in order for the building or improvement additions to meet the criteria for a qualified restaurant property. Establishments that will benefit from this provision are primarily stand-alone restaurants.

  • 2013 Tax Law | Up to $250,000 of Section 179 can be claimed. Qualified restaurant property that also meets the criteria of qualified leasehold improvements can qualify for unlimited 50% bonus depreciation. Any remaining cost basis that remains is depreciated over 15 years.
  • 2014 Tax Law | Neither Section 179 nor bonus depreciation can be claimed on qualified restaurant property. All qualified restaurant property is depreciated over 39 years.

For more information about tax depreciation deductions your restaurant can take advantage of, please contact Aaron Boker, CPA of Aronson LLC at 240-364-2582.

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