Some Taxing Issues for Hoteliers in 2015
Written by my colleague Leo Parmegiani—The lodging industry was not insulated from the tax challenges of the past year. Reflecting back on 2014, it was a year wrangled with Congressional bickering, partisanship and gridlock and, as a result, no passing of major tax legislation (unless you count the tax "extenders" passed at year-end and expiring only two weeks later). It was a year full of discord, including the troubled roll out of the Affordable Care Act (a.k.a. Obamacare); Congressional IRS hearings, with lost and retrieved emails serving only to make for more dramatic news coverage; so-called corporate inversions, resulting in U.S. corporations acquiring foreign corporations, swapping headquarters and reducing U.S. taxes; and, finally, a shift in control of the U.S. Senate after the mid-term elections.
2014 also saw much bi-partisan discussion of comprehensive tax reform, so there was much hope and much promise, but, in the end, no action. We have been assured by the new head of the Senate Finance Committee, as well as the newly-minted Chairman of the House Ways & Means Committee, that tax reform is a top priority. We will have to wait and see.
On a positive note, at the insistence of the National Taxpayer Advocate, the IRS adopted an official Taxpayer Bill of Rights. As rights go, it is not the Magna Carta, but certainly a step in the right direction.
As 2015 begins, the most important impact of 2014 will be the new rules that kick in and which will affect tax compliance and tax return requirements. They are the result of the Tax Increase Prevention Act of 2014 (TIPA) or are triggered by effective dates of earlier legislation, rulings and treasury regulations.
Affordable Care Act
Beginning January 1, 2015, employers with at least 100 full-time (or equivalent) employees must offer "affordable health coverage" that provides "minimum value" to the full-time employees and their dependents. If not, they will be subject to an employer shared responsibility payment if at least one full-time employee receives a premium tax credit for purchasing coverage through one of the new Affordable Insurance Exchanges. Such employers must offer coverage to at least 70 percent of full-time employees to avoid an assessable payment. For employers with at least 50 but less than 100 employees, the shared responsibility is deferred until 2016 if appropriate certifications are available, but the coverage percentage will increase to 95 percent.
Also for employer plan years beginning January 1, 2014 and thereafter, the Affordable Care Act mandates that employee wait periods for coverage cannot exceed 90 days, including holidays and weekends, after an employee is otherwise eligible.
Employers will clearly be wrestling with concepts, such as a "reasonable and bona fide employment-based orientation period" as a condition of plan eligibility; "minimum value" for employee coverage; "assessable payments;" and "premium tax credit." 2015 is also the first year that individuals must carry minimum essential coverage or make a shared responsibility payment with their personal tax returns. The IRS has developed a number of forms and guidance to carry out these rules, but suffice to say it will be a challenging year for human resource and payroll departments and headaches for accountants.
In December 2014, TIPA was enacted extending more than 50 popular—but temporary—tax incentives. The benefits applied retroactively through 2014 but, unfortunately, expired on December 31, so the rules apply through 2014 but no longer exist in 2015 without Congressional and Presidential action. Because of the late enactment, little planning was possible, but taxpayers will see benefits on their 2014 tax returns. Some incentives of keen interest to the hospitality industry include:
- 50 percent bonus depreciation;
- 15 year write-off for qualified real estate investments;
- increased Section 179 expensing;
- extension of the Work Opportunity Tax Credit; and,
- Enhanced Deduction for Food Inventory.
New Capitalization Rules
2014 was a busy year for the IRS in the capitalization arena and will require much vigilance during the 2015 tax year and beyond. Final guidance was issued in many areas; in particular, the rules regarding losses resulting from "partial dispositions" of property. IRS regulations generally affect all taxpayers that acquire, produce or improve tangible property but especially impact lodging facilities which require continual upgrades, remodeling and refreshes. Hospitality finance executives should be on the alert for numerous elections which are required with 2014 tax returns.
Some Highlights of the New Capitalization Rules
De Minimis Safe Harbor – Allows a taxpayer to deduct amounts paid for tangible property if the costs are not greater than specific dollar amounts determined at the invoice or item level if consistent with financial statements. The dollar threshold is $5,000 per invoice or per item as substantiated ($500 if no audited financial statements).
Overall Plan of Rehabilitation Doctrine Now Obsolete – The final regulations provide that indirect costs, such as repairs incurred during a period of renovation, do not need to be capitalized if not related to the capitalized improvement. The judicial doctrine which required all costs incurred as part of an overall plan of rehabilitation to be capitalized is obsolete.
New Annual Election – Small business taxpayers may elect a safe harbor for repairs, maintenance and improvements to buildings as long as eligible property does not exceed two percent of the unadjusted basis of the eligible building or $10,000, whichever is less.
Unit of Property Modification for Buildings – A taxpayer is now required to analyze improvement costs relative to eight building systems defined in the regulations (i.e., plumbing, electrical, HVAC, elevator, escalator, fire protection and alarm, security and gas distribution) to determine proper treatment. Material improvements to any of these systems will require capitalization even though the cost may be small relative to the entire building.
Replacement of Major Components or Structural Parts of Buildings – Allows for a loss on the disposition or replacement of a major component of a building (e.g., a roof). Prior to final regulations, taxpayers were required to continue to depreciate items which had already been replaced.
IRS Industry Guidance
On December 23, 2014, the IRS accepted a request for guidance as part of its Industry Issue Resolution (IIR) program regarding capitalization rules for restaurants. The objective of the IIR program is to resolve common issues with a specific emphasis on the Unit of Property (UOP) rules, refresh and remodel expenses, and general maintenance and repairs expenses.
* * *
Overall, 2015 will be a challenging year for the hospitality industry. As noted above, many provisions go into effect, and there is a new balance of power in the government. We should expect legislation to be passed by the House and the Senate, but whether the President will sign any bills remains to be seen. Hopefully, we will see comprehensive tax reform and tax incentives become permanent. Only time will tell….
This article was actually written by Leo Parmegiani, who is a CPA and tax partner in the firm of PKF O'Connor Davies, a division of O'Connor Davies, LLP in New York City. O'Connor Davies, LLP is a member firm of the PKF International Limited network of legally independent firms. Mr. Parmegiani serves on the firm's tax leadership committee and is the firm's international liaison partner for tax matters. www.odpkf.com. This article was published in the March 2015 edition of Lodging.