No longer just a bill, what effect will the new tax law have on your business?
Tax reform is no longer just a talking point among hoteliers; it’s a reality. It’s no longer just a bill; it’s law. What the recently passed tax reform legislation means for the hospitality and lodging industry, many are unsure, but one thing is certain: Hospitality executives across the ever-evolving landscape are optimistic.
“At the center of America’s resurgence are the massive tax cuts that we just passed before Christmas,” said President Donald Trump during a speech last month in Blue Ash, OH.
The president signed what is commonly referred to as the Tax Cuts and Jobs Act (TCJA) into law on Dec. 22, 2017, just a few days shy of Christmas Day (the House and Senate both passed the tax bill earlier in the month).
During his February speech at the Sheffer Corporation—a supplier of hydraulic and pneumatic cylinders—in Ohio, Trump added, “At the heart of our plan is tremendous relief for working families and for small businesses.”
More than 1,000 pages in total, TCJA, which represents the largest overhaul of the country’s tax code in more than 30 years (President Ronald Reagan signed the last one into law in 1986), was—as expected—met with outrage: Democrats claimed the bill would benefit only the wealthiest Americans; media outlets continued to remain skeptical of the GOP’s tax efforts; and Twitter users dedicated a hashtag to the bill—#GOPScamBill.
The bill’s drafters designed the legislation to produce the following outcomes: reduce the tax rate for individuals and businesses; increase the standard deduction and the child tax credit; repeal deductions for personal exemptions, certain itemized deductions, and the alternative minimum tax (AMT); and repeal the individual mandate associated with the Affordable Care Act (ACA), also known as Obamacare, a provision beginning in 2019.
Based in Washington, DC, nonpartisan think tank Tax Policy Center (TPC)—officially the Urban-Brookings Tax Policy Center—analyzed the TCJA as filed on Dec. 15, 2017. What the organization found: All income groups in both 2018 and 2025, on average, will see reductions in taxes. TPC also forecasted the following: Compared to the previous law, 5% of taxpayers will pay more in 2018; 9% in 2025; and 53% in 2027.
TPC projected TCJA will boost U.S. gross domestic product (GDP) by 8% in 2018; however, the law will have little impact on GDP in 2027 or 2037. As far as debt as a share of GDP, including macroeconomic effects and interest costs, TPC forecasted the law will increase it more than 5% in 2027 to 97% of GDP and nearly 4% in 2023 to 117% of GDP. Due to many individual provisions expiring after 2025, TCP projected macroeconomic feedback will boost the deficit savings by $3 billion from 2028 to 2037.
Despite the tax reform bill’s passage, the economy was expected to continue growing. Bernard Baumohl, chief global economist at The Economic Outlook Group, an advisory services firm specializing in forecasting the United States and international economies, during a session at The Lodging Conference in November 2017, before the final tax legislation passed, spoke highly about the economy’s future—at least in the short-term.
“We’re expecting the economy to grow about 2-3% over the course of the next three years through 2019,” he pointed out to attendees in Arizona. “…It’s largely because we’re seeing a build up of domestic demand here in the United States, and it’s being supported too by this tailwind, this extra tailwind that we’re getting from the economic rebound we’re seeing overseas. Together, they will provide a very good springboard for how the U.S. economy is going to perform over the course of the next three years.”
As far as what the tax reform legislation means specifically to the hospitality and lodging industry, execs are, for the most part, optimistic. While they’ve applauded the legislation for promoting a pro-business environment, they’ve also expressed caution—acknowledging TCJA is only the beginning; there’s still more work to be done.
Hoteliers are supportive of what the tax reform bill is expected to do for the hospitality industry. Before the bill’s passage, many leaders were in favor of reforming the tax code—and, just a couple of months after the bill signing, there’s been an outpour of industry praise.
“Tax reform will enable hoteliers to expand their businesses, create more jobs and help keep our economy strong,” said AHLA President and CEO Katherine Lugar when the bill was passed. “Tax cuts will contribute to the overall economic growth of our nation and strengthen our economy.”
A former Georgia state senator, Chip Rogers, president and CEO of AAHOA, who has been an avid advocate for tax reform from the start, acknowledged one of the biggest wins for the industry: the preservation of like-kind exchanges for real property assets.
“Preventing this vital tool for growth from being sacrificed to pay for other aspects of the tax bill was one of the top issues that AAHOA members educated their legislators about through numerous meetings, correspondence and a coordinated earned media effort,” he said.
The tax reform legislation also gives hoteliers additional ways to leverage new capital—which allows them to raise wages, hire new employees and expand. “The bill includes a 20% deduction for pass-throughs—such as S-corps, LLCs and partnerships,” Rogers said.
This is one of the areas where hotel industry executives see potential opportunity for small business owners resulting from the passage of TCJA.
“Many, if not most, hotels are owned in LLCs or S-Corps, which are not taxed at the entity level, but instead, the taxes are passed through to the members/shareholders like a partnership,” said Kirby D. Payne, president of HVS Hotel Management and HVS Asset Management—Newport. “The new law is very advantageous to these forms of entities.”
There are potential benefits to businesses up and down the ladder of various business structures types. “The corporate rate is cut from 35% to 21%, and the AMT is eliminated for businesses,” Rogers explained. “Lower individual taxes through the development of new brackets create savings for small business owners.” When less money is being kicked up to Uncle Sam, businesses have more opportunities to leverage their earnings.
“Anytime you can get more of your earned income into your own organization versus the government coffers, the results tend to be positive,” said Brad Rahinsky, president and CEO of Hotel Equities, an Atlanta-based management and development company. “Whether it’s allocating those resources toward projects and developments that have been sidelined, improving organizational infrastructure or increasing wages that have been artificially suppressed, these reforms will improve ownership positions across the board.”
He continued: “The impact of the law will result in a net positive. With additional revenue being infused back into the market and fundamentals already strong both domestically and internationally, the freeing up of capital will produce additional GDP growth.”
Michael Bellisario, VP and senior research analyst at Robert W. Baird & Co., expects, as a result of the tax reform law, travel—both domestically and internationally—to increase. “Corporations’ profits are increasing and consumers have more money in their paychecks as a result of tax reform, and the expectation is this will lead to more travel and travel-related spending,” he said.
Arne Sorenson, president and CEO of the world’s largest hospitality company, Marriott International Inc., based in Bethesda, MD, during a recent earnings call, touched upon willingness from corporate leaders to increase business travel spend post tax reform. “On the positive side, I’ve been struck by how broad the optimism is among U.S. corporate CEOs, really dramatically improving post-tax reform,” he said. His thoughts weren’t entirely optimistic, however; he followed up with words of caution.
He continued: “But the tone, for example, in many of the conversations I’ve had with folks is really quite bullish,” he said. “That doesn’t, sadly, immediately translate into somebody saying, therefore, I’m going to have our team out there spending more money on hotels. I think in a sense, that’s a detail, if you will, from at least most CEOs’ perspectives. But I think if that optimism translates into better corporate profits, if it translates into more investing activity by companies, I think, inevitably, we’ll see that that is positive for corporate demand for our industry.”
Hyatt Hotels Corporation didn’t talk much about reform during its most recent earnings call; however, Patrick Grismer, the Chicago-based hospitality group’s CFO, briefly touched upon TCJA after a few comments about Hyatt’s tax guidance for this year.
“Our 2018 cash tax savings resulting from a recently enacted tax reform package is expected to be approximately $20 million to $25 million, which will provide more cash available for reinvesting in growth of our business and returning capital to shareholders,” he said.
During Hilton’s most recent earnings call, Chris Nassetta, the McLean, VA-based hospitality company’s president and CEO, spoke highly of the TCJA: “The bulk of our tax reform benefits will be returned to shareholders.”
In response to a question about tax reform, he added, “If I think about where we are this year and the conversations I was having versus where we were last year, I would say it is a very, very different tone; I think it’s also being driven certainly in the U.S. by the regulatory environment being easier on companies.”
What does the TCJA mean for Parsippany, NJ-based Wyndham Worldwide? In a recent earnings call, David Wyshner, the hospitality company’s CFO, commented on the TCJA, acknowledging that “the recently enacted Tax Cuts and Jobs Act is good news for us.
“In the fourth quarter, we recorded a $415 million non-cash tax benefit as we reduced our net deferred tax liability because of the new lower federal rate,” he said. “Even more importantly, we expect that our effective tax rate applicable to adjusted pre-tax earnings will be approximately 25% going forward, about 12 points below where it was previously. And over time, our cash tax rate will be around 19% instead of 30% previously. This will enhance our free cash flow by around $100 million a year. Over time, we expect that tax reform will allow us to invest more in our business and to have more cash flow available to return to shareholders.”
There’s also a positive spin for small business owners who have plans to keep their businesses within the family tree. “The estate tax allowance has been doubled to $11 million for individuals, and $22 million for couples,” Rogers explained. The TCJA also dropped the top marginal tax rate from 39.6% to 37%.
Summing up the positives, Y. David Scharf, a partner at Morrison Cohen LLP in New York, said: “It is possible that the decreased tax rates in the TCJA will lead to further investment in the hospitality industry, especially in companies well positioned to take advantage of the real-estate pass-through deductions (hotel companies, ski resorts, etc., all to the extent they are able to structure themselves accordingly). Particularly if the world economy remains healthy, international travel will be on the rise, and the hotel industry will be well positioned to invest in order to capture that new growth.”
But many leaders, including Scharf, also see potential downfalls as a result of the legislation.
“The laudable goals of the TCJA were to lower tax rates, while reducing corporate loopholes, in order to provide a simpler tax system with lower rates overall,” he said. “However, ending some deductions that may have been seen as ‘loopholes’ while leaving other deductions available serves to incentivize spending in some sectors and disincentivize spending in others. An ideal tax plan would not be favoring some hospitality sectors over others, or some corporate structures over others. That kind of tax code only encourages creative structuring and accounting, which incentivizes investing in lawyers and accountants rather than unleashing investment in the business itself.”
John Myrick, senior acquisitions manager at Bloomberg BNA—a source of legal, tax, regulatory and business information for professionals—agreed to an extent: “Overall, the 2017 tax act will likely reduce income tax bills for most of the hotel industry, but the act’s repeal of the entertainment and expense deduction might decrease customer spending, which could threaten some industry profit.”
Unlike the old law, the TCJA eliminates deductions for business entertainment. Some executives say that this law change could have a negative impact on overall spending in the hospitality industry.
“Under the old rules, companies could deduct 50% of a variety of business entertainment expenses, such as client meals, event tickets, charitable event tickets and membership fees,” Scharf explained. “Under the new law, no deduction is allowed for any activity generally considered to be entertainment, amusement or recreation. No deduction is permitted related to a facility used in connection with entertainment, amusement or recreation. Deductions are also disallowed for membership dues with respect to any club organized for business, pleasure, recreation or other social purpose.”
It’s because of the new law that some companies may hold back on client spending—thereby negatively impacting hospitality as a whole. “Does the client need that lavish dinner?” Scharf asked. “Does the golf outing for the clients make sense if it’s no longer deductible in any way? Should the stadium suite be renewed?”
While the deduction repeal under the new law could be seen as a negative by many, the provision may not turn out to be as bad in practice as some believe it is.
“The law repeals the deductions for meals and entertainment expenses, so employers may look to limit the expense accounts of employees,” Myrick said. “However, those deductions were already limited to 50% of expenses under prior law, and there will likely remain a business need for the entertainment of prospects and customers, so this change may not be as bad as it sounds. Given the extra cash corporations will have on hand from the reduction in the corporate rate, they may not care too much about the loss of this partial deduction. Also, the law did not otherwise change much about the tax deductions available for business travel.”
Even though many industry executives have come out in support of the TCJA, they all also agree on this: There will be changes to the law—or at least there will be some clarification on implementation. This is where industry uncertainty may come into play.
“The law will undergo a substantial regulatory process, and we look forward to working with hoteliers and industry partners to shape how this will impact our members,” Rogers said. “It is the beginning, not the end, as legislators have said that this is an ongoing process. We are confident that changes to the tax code won’t take another 30 years. What we are looking forward to is clarification on implementation so hoteliers will know how to prepare to file their taxes.”
With the TCJA still being fairly new, companies, specifically management teams across all industries, are still evaluating changes to the tax code and what it means to them. “When the C-suite becomes more comfortable with these changes, we could see incremental spending from companies broadly, which could lead to faster economic growth and improved hotel demand as well,” Bellisario said. “Once the creases in the TCJA are ironed out, those in the industry who have something to gain will lobby for it.”
“Everyone, especially those from industries not treated as favorably as our industry, will be looking for improvements,” Payne said. “Most likely they’ll get some and those may affect our industry, one way or another.”
What’s important is the idea of capital being reinvested into the market becoming reality. “The true impact and ramifications of the new codes are still playing out. Hopefully, the increase in captured income gets deployed back into the market and doesn’t simply rest on balance sheets,” said Rahinsky, who acknowledged the ongoing complexity of the tax code still, pointing out there are just “too many moving parts.”
When asked if he foresees any changes to the law, he replied, “As sure as the sun will rise”—and, already, there are executives pointing out areas in need of adjustments.
Another potential change to consider (or “technically correct”) is with regard to qualified improvement property structural improvements, according to Randy Meyer, CFO, The Hotel Group, an Edmonds, WA-based development and management company.
“Originally, structural improvements were intended to qualify for bonus depreciation; however, as now written, that is not the case, in spite of Congress’ intent,” he said. “We do believe the aforementioned item will be corrected, as well as other technical corrections as the IRS conducts its rulemaking process.”
As always, changes to federal law requires cooperation—from within the beltway, in particular, and if Republicans and Democrats come together, flaws can be taken care of.
“Tax law is notoriously difficult to change, but, in the coming year or two, to the extent that obvious flaws from the law emerge, fixing the TCJA—particularly in ways that will reinstitute certain deductions and lower the overall tax burden—may be one of the few areas in which Republicans and Democrats will agree,” Scharf said. “And as Congress is currently comprised, Republicans do not need any Democratic votes to amend the TCJA in ways that they might favor. I would not be surprised to see amendment proposals emerging over the next year.”
What’s in store?
Many execs are hopeful of how the TCJA will unfold over the year—and that’s due to the positivity among those within business community and outside economic factors.
“GDP growth has accelerated,” said Michael Medzigian, chairman and managing partner at Watermark Capital Partners LLC, a Chicago-based REIT. “Businesses—including lodging-related businesses—have already announced plans to increase expenditures. It’s still early, but there’s a sense around the industry that lodging demand growth is firming and will benefit.”
While industry leaders are mostly in agreement—things have been looking up—the law itself, with the help of government agencies, will, more than likely, unfold gradually. “The process of drafting the rulemaking by the IRS is significant and likely will go through numerous iterations before final guidelines are issued by the service,” Meyer said.
As the TCJA unfurls, politics as usual will also guide the conversation. “You’ll hear from some that this was a positive move that impacts all in a good way,” Rahinsky said. “You’ll hear from others that this was a decision made by wealthy individuals to help wealthy individuals.”
Others believe it’s too early to tell what’s in store for the TCJA. “The tax act happened quickly at the end of last year and contained a lot of surprises,” Myrick said. “We will likely see technical corrections and changes this year, but it’s unlikely that any of the reforms will be significantly affected.”
Still, even if it’s still a bit too early to pass judgment on the TCJA, the industry, for the most part, is hopeful.
“Hoteliers are incredibly optimistic about opportunities for growth now that the tax overhaul is the law of the land and are pleased with the signed bill,” Rogers said. “With the tax savings that businesses and families will realize under this law, more Americans will be keeping more of their income, and studies show that discretionary income is disproportionately spent on travel—which will be a boon to the hospitality industry. Domestic travel is already on the rise in the U.S., and this is great news for our nation’s hoteliers.” HB