If you haven’t kept up to date on the latest tax reform proposals, The Tax Cuts and Jobs Act includes provisions for immediate expensing of 100% of qualified property placed in service after Sept. 27, 2017 and before Jan. 1, 2023.
As with any law, there are always exceptions. One exception to the immediate expensing of property is that it will not be available to real property trades or businesses.
What does this mean for hotels? Is a hotel considered a real property trade of business?
The tax bill did not define a “real property trade or business;” however, we can look to an existing definition in the IRS code for a definition:
- The IRS defines a “real property trade or business” as any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.
This definition deals with real estate professionals who qualify as such by providing personal services in a real property trade or business, which in this case includes any interest in rental real estate (real property used by customers or held for use by customers in a rental activity).
At first glance, the above information would make you think that a hotel would most certainly fall into the category of a real property trade or business and be disqualified from taking advantage of the immediate expensing provision of the tax bill. Customers reserving or “renting” a room at a hotel would seemingly create a rental activity.
However, two exceptions to this definition would apply to hotels:
- The average period of customer use for such property is seven days or less, and
- The average period of customer use for such property is 30 days or less, and significant personal services are provided by or on behalf of the owner of the property in connection with making the property available for use by customers.
These exceptions would support a conclusion that a hotel is not a real property trade or business and therefore would be eligible for the immediate expensing provision.
Beware that the immediate expensing would only be for qualified property which is not defined in the bill. There is also an existing definition for this in the tax code that would suggest this could include everything except real property.
Cost segregation studies could be more important than ever to ensure your company is complying with the proposed law, if enacted, and not missing out on any deductions it could potentially create.