The Profit Statement
Summer 2010
Will hotel developers see any green from “going green”? By Ryan Henigan, CPA and Nick Hollander, CPA, Reznick Group
Some hotel owners and developers have chosen to build or go “green” and reduce their carbon footprint. But do “green” hotels attract more guests? Is the effort worth it? In many cities, that’s a moot point, because “going green” is now mandatory. Take Baltimore, Maryland, for example. The city requires hotels constructed after July 1, 2009, that have at least 10,000 square feet of gross floor area to achieve Silver LEED (Leadership in Energy and Environmental Design) certification from the U.S. Green Building Council (USGBC.org).
The primary construction features involved in certification include: n Specified mechanicals and energy-
efficient lighting,
n Carpeting made from recycled materials, n The use of locally obtained materials, and
In This Issue n Will
hotel developers see any green from “going green”?
n Don’t
overlook the Work Opportunity tax credit
n The use of paint with low or no volatile
n Take
Meeting LEED certification requirements can increase construction time and costs. But going green can also result in bottomline and other benefits that make green
n Save
organic compounds (VOCs).
a (tax) break from high commuting costs tax on foreign income with an IC-DISC
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continued on page 2
Don’t overlook the Work Opportunity tax credit If you have or will hire new employees this year from certain target groups, such as food stamp recipients, ex-felons and disabled individuals, your business may be entitled to a Work Opportunity tax credit (WOTC) for qualifying hires. The credit, which reduces taxes dollar for dollar, ranges from $1,200 to $9,000 per new hire. So in today’s economy you may find it especially worth considering, despite the complicated requirements and application process. More groups now eligible Though often ignored, WOTC is far from new. This tax credit was created in 1996
by the Small Business Job Protection Act to replace the Targeted Jobs tax credit and was reauthorized in 2007 by the Small Business and Work Opportunity Tax Credit Act, with an expiration date of Aug. 31, 2011. Last year, the American Recovery and Reinvestment Act added two new WOTC target groups for 2009 and 2010: unemployed veterans and “disconnected” youth. As a result, there is now an even larger pool of potential hires eligible for the credit. (See “WOTC target groups” on page 3.)
Kerry Balagtas n 301-280-2730 n kerry.balagtas@reznickgroup.com n www.reznickgroup.com
Very specific requirements Each target group is subject to specific and often different requirements. For example, unemployed veterans must have been discharged from active duty within five years before the hire date and have received unemployment compensation for at least four weeks during the one-year period ending on the hire date. And short-term Temporary Assistance for Needy Families (TANF) recipients must have received benefits for at least nine months during the 18-month period ending on the hire date. continued on page 3
The Profit Statement
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... green from “going green”? continued from page 1
hotel construction worth it. So, should you invest in building green hotels? Pros and cons The short answer is probably yes. That’s not only because going green allows you to build in desirable markets you’d otherwise have to forgo, but also because green hotels have pluses like these: n Tax incentives that help offset the
higher construction costs,
n Decreased long-term operating costs, n Greater attractiveness for the growing
number of eco-minded travelers,
n Energy savings and other environmen-
tal benefits, and
n Potentially greater resale value.
Of course, you’ll need to weigh these benefits against the cons of green construction. These include a need for: n More site and development planning, n Longer lead times in ordering
building products,
n Additional structures to support
certain green options, and
n Resolving zoning issues associated
with locating a building for sunlight.
In addition, green hotels can lead to guest complaints about such things as weaker water pressure and difficulty getting rooms to desired temperatures with energy-efficient heating and cooling systems.
Incentives abound Many owners and developers might also consider the overall cost of building a LEED-certified hotel a con. But it’s not as expensive as you might think. With careful planning, the cost of going green is on average only about 5% more than conventional construction. That’s because federal and state governments offer numerous grants relating to energy efficiency, environmental quality and health that assist with green construction. Two good resources for finding grants for green projects can be found on the Web sites of the Database of State Incentives for Renewables and Efficiency (dsireusa.org) and the Environmental Protection Agency (epa.gov/greenbuilding/tools/funding.htm).
Editorial Board n
Atlanta
n
Baltimore
n
Kenneth E. Baggett, CPA 404-847-9447
n
John Woodbury, CPA 847-324-7612
William T. Riley, Jr., CPA 410-783-4900
n
n
B ethesda Managing Editor Kerry Balagtas 301-280-2730
Charlotte
Anthony V. Portal, CPA 704-332-9100
Chicago
Sacramento
Beth Mullen, CPA 916-442-9100
n
Tysons Corner
Ernie Sanders, CPA 703-744-6700
The Internal Revenue Code also has green options such as IRC Section 179(d), which allows the owner of the hotel to immediately expense the cost of energyefficient property and equipment up to a cap of $1.80 per square foot. Adding solar panels on the roof of a hotel can generate a 30% tax credit from the federal government. In conventional banking, green lending is still in its infancy, so no specifically green financing packages are available. But consult your lending professional for available options. Financial benefits The operating budgets of LEED-certified hotels are generally lower than those of comparable nongreen ones. An owner can expect a variety of operational savings depending on what green systems are implemented, such as the use of solar or geothermal energy, greywater systems (water recycling), and energy-efficient HVAC systems and lighting. Green construction and operations are still too new to determine the exit capitalization rate (a valuation method) for green buildings and how LEED certification will affect their valuation at sale. Consequently, the Green Building Finance Consortium (GBFC) group is currently developing the underwriting practices, tools and valuation methodologies required continued on page 3
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to assess from a fiduciary perspective the merits of investing in or lending to green buildings. (See greenbuildingfc.com for more on this).
is worth it in terms of a bigger share of eco-minded guests, a better environment and potentially greater profitability. But the evidence in favor of going green is mounting, as is interest by developers. So it’s certainly worth looking into.
Worth looking into Ultimately, developers will need to consider whether the cost of “going green”
If you would like assistance in evaluating the costs and benefits of building a green hotel, or in taking advantage of state and federal incentives for this purpose, please
... green from “going green”? continued from page 2
... Work Opportunity tax credit continued from page 1
To receive a WOTC, an employer must request and receive certification from its state workforce agency. This involves submitting: n IRS Form 8850, “Pre-Screening
Notice and Certification Request for the Work Opportunity Credit,” no later than 28 days from the employee’s start date,
let us know. We would be glad to help you find the green in going green. Ryan Henigan , CPA, is a senior manager in the Baltimore office of Reznick Group. He can be reached at ryan.henigan@ reznickgroup.com or 410-783-6592. Nick Hollander, CPA, is a manager in the Baltimore office of ReznickGroup. He can be reached at nick.hollander@ reznickgroup.com or 410-783-6598. n
WOTC target groups Under the American Recovery and Reinvestment Act of 2009, hires from the following groups are now eligible for the Work Opportunity tax credit. n Veterans who are disabled or unemployed, or receive food stamps, n “ Disconnected youth” age 16 to 24 who aren’t in school, employed or readily employable due to a lack of basic skills, n Individuals age 18 to 39 who receive food stamps, n Individuals receiving Supplemental Security Income (SSI) benefits,
n ETA Form 9061, “Individual
n S hort- and long-term recipients of Temporary Assistance for Needy Families (TANF) benefits,
n Documentation proving that the
n D isabled individuals referred after completion of a qualified vocational rehabilitation program,
Characteristics Form,” and
new hire is a target group member.
Upon receiving the certification notice, the employer must employ the worker for the number of hours specified in the notice for the given target group. Savings can be significant For most targeted groups, the maximum credit is 40% of first-year wages up to $6,000 (a maximum credit of $2,400). For disabled veterans, the maximum credit is 40% of first-year wages up to $12,000 (a maximum credit of $4,800). And for summer youth employees, the maximum credit is 40% of first-year wages up to $3,000 (a maximum credit of $1,200). For long-term TANF recipients, the maximum credit is 40% of first-year wages up to $10,000 (a $4,000 credit), plus 50% of second-year wages up to $10,000 (a $5,000 credit, so there’s a maximum credit of $9,000 over a two-year period). Also, the WOTC deadline for hiring members of this group is Aug. 31, 2011, when the credit currently is scheduled to expire.
n I ndividuals age 18 to 39 who live in empowerment zones, enterprise communities or renewal communities (“designated communities”), n S ummer youth employees age 16 and 17 who live in designated communities and work at least 90 days between May 1 and Sept. 15, and n E x-felons hired within one year after conviction or release from prison.
The maximum WOTC is available for employees who work 400 hours or more during their first year of employment. A partial credit equal to 25% of qualifying wages is available for those who work between 120 and 399 hours. The credit or any unused portion of it can be carried back one year and forward 20 years from the year in which the credit is claimed.
A dollar saved is a dollar earned As the economy picks up steam and you start to see a need to add to your workforce, consider hiring WOTC-eligible workers. The tax dollars you save go right to your bottom line, and you’ll give individuals who need it an opportunity to boost their incomes while helping to increase yours. n
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Take a (tax) break from high commuting costs In the current economic environment, every bit of savings helps. So it pays to become familiar with two tax breaks that can help soften the blow of rising transportation costs: qualified transportation fringe benefit programs, and deductions for the cost of traveling between your home and a short-term work location. Even bicycling can qualify Commuter tax benefits are a win-win for businesses and their employees. Employers that provide workers with transit passes, vanpool services or parking at or near the office or a mass-transit facility can deduct the expense while excluding the benefits from employees’ wages. These benefits can be provided in the form of a noncash benefit (such as the free use of a pay parking lot) or a taxable reimbursement of up to $230 each. Therefore, if you both use mass transit and park near a
mass-transit station, you may be eligible for a total of $460 in benefits. If you do not participate in either of the benefits and use your bicycle to commute, you may be eligible for a $20 monthly benefit. But you’ll pay tax on the reimbursement you receive.
While the benefits are not huge, they’re definitely enough to be more than worth the effort.
Alternatively, employers can allow employees to use pretax income to pay for transit expenses. In this case, employers save payroll tax on the amount of employees’ income used for these transportation-related expenses.
Deductible commuting expenses Generally, the cost of commuting between home and work is considered a nondeductible personal expense. But IRS Revenue Ruling 99-7 specifies three exceptions under which these costs are deductible: 1. You travel between your home and a temporary work location outside the metropolitan area where you live and normally work. This exception recognizes that it would be unreasonable for you to relocate your principal residence for a short-term job. 2. You travel between your home and a temporary work location, regardless of distance, and you have one or more regular work locations away from your home. For example, you’re a consultant who sometimes travels directly from home to a client’s site. 3. You travel between your home and a temporary or regular work location, and your home qualifies as your principal place of business. For example, you’re a consultant who works out of your home and travels to client sites (temporary locations) while also renting conference space away from home (a regular location). The IRS considers a work site temporary if employment there “is realistically expected to last (and does in fact last) for one year or less.” However, if a job is initially expected to last one year or less but that expectation changes during the course of the job, it’s treated as temporary until the date it becomes evident that the job will last more than one year. A job assignment of indefinite duration isn’t considered temporary. Worth taking advantage of Both of these tax breaks entail minimal work by employers to offer their employees. And, while the benefits are not huge, they’re definitely enough to be more than worth the effort. If you’re not already taking advantage of these tax breaks, we’d be glad to show you how. Just contact Reznick Group at 301-652-9100. n
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Save tax on foreign income with an IC-DISC Given the uncertain future for current tax benefits on income generated overseas, you may want to consider forming an interest charge–domestic international sales corporation (IC-DISC). By taking advantage of this often-ignored tax break — which has been around for many years — your manufacturing company may realize substantial tax savings on export-sales income. How it works To benefit from this tax-saver, you establish a pass-through entity, such as a partnership or S corporation, as an IC-DISC. Your manufacturing company enters into an agreement with the IC-DISC that appoints it as your company’s agent for the sale of exports abroad. Under this agreement, you then pay the IC-DISC a percentage of your manufacturing company’s export revenue. This “commission” can be up to 4% of your qualified export receipts, or 50% of your taxable income, whichever is higher. As a pass-through entity, the IC-DISC doesn’t pay taxes on these commissions. Distributions of commissions to shareholders are subject (at least through 2010) to only the 15% capital gains tax rate. Therefore, based on the ordinary 35% corporate tax rate, you can enjoy a 20% tax break on the commission paid to your IC-DISC. More than tax benefits An IC-DISC can be a way to have your cake and eat it, too. That’s because you
can choose to not immediately distribute IC-DISC earnings to shareholders, but to defer them by lending them back to your exporting company. With interest rates at historic lows, you can then use the money to support your growth strategies. Keep in mind that you can defer only the predetermined commission percentage — 4% of your export company’s qualified export receipts, or 50% of its taxable income — up to a limit of $10 million in annual export income. However, thanks to research and development (R&D) tax incentives, companies that use IC-DISC loan money for R&D may enjoy additional tax breaks. Besides saving tax, an IC-DISC can be used in a number of other financial and operational strategies that benefit your company. The more creatively you think, the more your export company can benefit from forming an IC-DISC. (See “Gain more than tax savings” at right.) Do you qualify? In order to benefit from an IC-DISC, your company must sell “export property.” This means goods that are manufactured in the United States (with at least 50% U.S.-manufactured content) and are held for sale, lease, rental, consumption or distribution outside the U.S. Furthermore, your IC-DISC must generate at least 95% of its gross income from qualified export receipts.
Gain more than tax savings Other benefits of forming an IC-DISC include: n F acilitating succession planning by generating cash that can help shareholders fund buyout plans, n E xtending income benefits to family members named as IC-DISC owners, n M otivating employees to work for higher export sales by naming them shareholders of your IC-DISC, and n G enerating additional tax benefits by using your IC-DISC for activities such as export-related promotions and advertising.
You can form an IC-DISC under the laws of any state or the District of Columbia. But it must have: n Only one class of stock, n Minimum capital of $2,500, and n Owners that are the same owners of the
exporting company, family members of company owners or key staff members of the exporting company. For privately held C corporations, individual stakeholders should be the IC-DISC’s owners to avoid being taxed twice.
Also, while your IC-DISC doesn’t need assets, office space or employees, it must maintain records separate from those of its relevant exporting company. Should you form one? If your manufacturing company qualifies, an IC-DISC can be a good idea, not just for saving tax, but also for achieving other business objectives. To see if an IC-DISC is right for you, please give us a call. We would be glad to tell you more about this tax-saver and help you get the most out of it and other ways to reduce your tax burden. n
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About Reznick Group Reznick Group is a national leader in accounting, tax and business advisory services. We work in a broad spectrum of industries, including affordable housing, commercial real estate, emerging business and entrepreneurial enterprises, government agencies, nonprofit organizations, professional services, Real Estate Investment Trusts (REITs), renewable energy, and residential home builders. A national leader in providing accounting, tax and business advisory services, Reznick Group serves clients in a broad spectrum of industries. Reznick Group is ranked among the top 20 public accounting firms in the country and maintains offices nationwide. To learn more about Reznick Group’s services, seminars and conferences, or to view our insights on issues that may impact your industry, visit reznickgroup.com.
PLAN TO ATTEND Business professionals look to Reznick Group, a respected leader in the real estate, renewable energy and affordable housing industry, to provide timely information and updates on the latest trends and opportunities in the market, as well as the business implications of key legislative issues. Our conferences and events offer significant networking and business-building opportunities with industry veterans, presentations from thought leaders, and training sessions on industry fundamentals. The following is a schedule of our upcoming 2010 events. Conference dates, topics and venues have been posted to help you plan your schedule. All dates are subject to change. Complete event information can be found on our website, www.reznickgroup.com. Reznick Group’s Real Estate and Renewable Energy Markets Forum August 24 – 25, 2010 Atlanta, GA Historic Tax Credits Conference, co-sponsored with IPED October 7 – 8, 2010 Philadelphia, PA For more information, visit www.reznickgroup.com.