Tax laws

How New Tax Laws Can Impact the Hospitality Market: Are You Ready?


While all industries were affected during the pandemic, none may have suffered devastation like the hospitality market. Now, widespread vaccine deployments have contributed to a sense of optimism (tinged with caution), and yet, even as occupancy rates begin to rise, the resurgence of the hospitality industry faces other threats. A number of proposed tax laws could lessen the expected market rebound, limiting profits and growth.

However, not everyone is aware of the impact these taxes have on their businesses, notes Ken Bernice, managing director of global consultancy FTI. As a leader in the space, FTI team members help make informed decisions for those likely to be affected by assessing each unique situation. In some cases, this involves providing advice and decision-making confidence for clients whose portfolios are at risk of being acquired or completely dissolved. In other scenarios, FTI has supported hospitality clients who may have merged with other companies for increased results.

Whatever your current situation, here’s what you need to know about the implications of tax laws for the hospitality market.

Bright spots have helped the industry cope

As the hospitality industry collapsed, including the lucrative convention sector, tax breaks were within reach. First the The occupancy tax rate for hotel rooms was eliminated during the significant summer months as tourists flocked to the Big Apple again.

In addition, the decline in net operating income has given the industry the ability to defer, appeal or reassess property taxes. And COVID-related tax deductions have added another layer of relief. “Specifically, employee retention credits and payroll tax deferrals have given a much needed boost, ” says Steve Bertonaschi, Senior General Manager of FTI’s Real Estate Solutions Practice. He adds that retention credits are likely to be further extended based on the latest proposals.

New taxes could cause financial damage

While this relief is welcome, the reprieve could be short-lived, given the tax increases proposed on the horizon. As is the case in most industries, these could have a direct or indirect impact on the hotel industry, underlines Bertonaschi. “An increase in taxes at the corporate level would certainly be that direct hit, but at least in the latest discussions, this increase appears to be dropped,” he says. “And while a tax hike for the rich may still be of concern, at this point it doesn’t look like it would have a significant impact.”

But for real estate professionals, there are a number of sections in the tax laws proposed by the current administration that could be of concern, Bernice says, citing the following:

  • An increase in the rate of net long-term capital gains from 20% to 25%.
  • A tax on the accounting income of certain large companies
  • An amendment to the Business Interest Limitation Rules to enforce Section 163 (j) of the Internal Revenue Code (“IRC”) at the partner level, and deferral of unauthorized business interest expense deferrals expire after five years. “This provision could change the denial of interest from a temporary difference to a permanent difference, thus increasing the taxable income of real estate companies,” warns Bernice.
  • Proposal of deferred interest that would replace the existing mechanism under IRC Section 1061 (a) to calculate the long-term short-term requalification amount. As Bernice explains, under the current proposal, the “applicable net partnership gain” of a partner in respect of an applicable partnership interest could be converted into a capital gain. in the short term, unless an exception is applied. “Among other provisions, the proposal would extend the holding period for long-term capital gains for gains attributable to an applicable partnership interest from three to five years, and those who hold a deferred interest would be subject to tax. higher on their participation, ”he said.

Bernice adds that on a positive note, real estate professionals were concerned that the Biden administration would eliminate the tax-deferred exchange from IRC Section 1031, which allows a landlord to sell real estate for investment and defer the taxes that would normally be due on this sale. . According to Bernice, members of the House Ways and Means Committee recently distributed letters to their constituents letting them know IRC Section 1031 was safe.

Now is the time to mitigate the impact

As with any proposed tax change, the best way to prepare is to speak with professionals who have proven expertise in this area, Bernice said, noting the widespread presence of FTI with offices in New York, Calif., Chicago. and the UK.

Bertonaschi says FTI’s advice and guidance has enabled the client to be successful using the strategies most applicable to each, whether through expansions, mergers, acquisitions or dissolutions.

“Mergers and acquisitions have hit the industry hard, with leading hotel companies, including hotel REITs, making strategic acquisitions in an environment conducive to consolidating businesses, centralizing management and realizing savings of larger scale, ”he said. Although acquisitions additionally offer the possibility of obtaining immediate tax deductions through depreciation of a significant amount of assets, it is essential to ensure that transactions are created to take advantage of greater efficiency. tax, an area in which FTI has considerable experience.

Bernice adds that they have seen a number of hotel acquisitions where opportunistic private equity funds acquire ailing hotel portfolios. “The pandemic has caused a decline in value and immense challenges, forcing hotel companies to reassess and / or reposition their portfolios,” he said.

In addition, some sizeable portfolios have undertaken major investment projects in their hotels during the pandemic to better reposition themselves positively for the recovery. These projects have another advantage in that they could lead to powerful tax savings through capital cost allowances.

Bertonaschi has also advised many clients who take this opportunity to modify their leases on more attractive terms, in particular in a Real Estate Investment Trust (“FPI”) ooperating company / real estate company lease structure. “The goal is not only to help improve cash flow, but also to better manage taxes, including the use of tax attributes afterwards.”

While there are many opportunities in the market today, hospitality businesses need to rely on seasoned professionals who can help them evaluate options and weigh the risks and rewards to create the best potential benefits.

Would you like more information on the potential impact of these new taxes on your business? Connect with team members in your region who can help you identify and mitigate risk by contacting FTI today. Click here to login today.

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FTI Consulting is an independent global business consulting firm dedicated to helping organizations manage change, mitigate risk, and resolve disputes: financial, legal, operational, policy and regulatory, reputational and transactional. FTI Consulting professionals, located in all major business centers around the world, work closely with clients to anticipate, inform and overcome complex business challenges and opportunities. The views expressed herein are those of the authors and not necessarily those of FTI Consulting, Inc., its management, subsidiaries, affiliates, or other professionals. FTI Consulting, Inc., including its subsidiaries and affiliates, is a consulting firm and is not a chartered accountant or law firm. © 2021 FTI Consulting, Inc. All rights reserved. www.fticonsulting.com