There are new provisions within the One Big Beautiful Bill Act (OBBBA) that provide potential opportunities for the hospitality industry. Hotel owners and operators can now take advantage of these powerful new tax measures designed to accelerate deductions, improve cash flow and incentivize reinvestment. From the return of 100% bonus depreciation to expanded Section 179 expensing and changes to interest and wage deductions, these updates aim to offer immediate and long-term financial benefits. Understanding and acting on these changes can position your hotel for stronger growth and profitability in the years ahead.
100% Bonus Depreciation: Immediate Deduction for Capital Investments
100% bonus depreciation has been reinstated and made permanent, which allows hotel owners and operators to fully deduct qualified assets acquired and placed in service after January 19, 2025.This reverses the Tax Cut and Jobs Act of 2017 (TCJA) bonus depreciation phase-down that was underway (40% in 2025, 20% for 2026, and 0% thereafter), which gives an immediate tax deduction, reducing tax liability and freeing up capital for reinvestment.
Qualified Assets
- Vehicles and Furniture, Fixtures, and Equipment: Shuttle vans and other vehicles, kitchen equipment, guestroom/hotel furniture and fixtures with a recovery period of 20 years or less.
- New Construction, Expansions, or Purchases: Cabinetry, flooring, wall coverings, decorative lighting, specialty electrical, plumbing, HVAC equipment hook-ups, land improvements, etc. (but not limited to), with a recovery period of 20 years or less.
- Qualified Improvement Property: Interior improvements to the hotel, such as lobby areas, guestrooms, office areas, kitchen and restaurant areas, etc. (e.g., walls (non-load bearing), lighting, flooring, and other finishes) with a recovery period of 15 years. Excludes building expansions, elevators, escalators, roofing, exterior finishes or exterior windows and doors.
- Software: Certain inventory or customer/management software.
Qualified assets must be acquired after January 19, 2025.This requires reviewing binding written contracts to certify the proper acquisition date.For example, if a contract to purchase equipment is prior to this date, the deduction may only be the 40% bonus depreciation under the TCJA rules. Cost segregation studies can identify various qualifying assets for faster deductions, boosting cash flow for upgrades or expansion.
Section 179 Expensing: Increased Deductions
The OBBBA increases the deduction limit to $2.5 million, with a phase-out threshold of $4 million (both indexed for inflation) for property placed in service after December 31, 2024. This allows immediate deduction of the cost of qualifying assets, such as furniture, equipment or off-the-shelf software, up to the limit. Unlike bonus depreciation, Section 179 can be applied on an asset-by-asset basis, offering flexibility for capital purchases.
Section 163(j) Business Interest Deduction
The OBBBA reinstates the EBITDA-based method for calculating the Section 163(j) business interest deduction limit, effective for tax years starting after December 31, 2024. This lets more interest be deducted by including depreciation and amortization in the taxable income calculation, benefiting capital-intensive businesses like hotels for financing expansions or renovations. However, new rules limit capitalizing interest to avoid this restriction, so careful planning is needed.
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No Federal Income Tax on Tips (Up to $25,000)
The new law offers a temporary deduction for tip income (up to $25,000 per person) for 2025 through 2028, reducing federal taxable income for tipped employees in industries like hospitality. The deduction phases out for incomes above $150,000 ($300,000 for joint filers). This can boost employee retention and morale, but FICA taxes still apply, and tips must be reported on Form W-2.
No Federal Income Tax on Overtime Pay (Up to $12,500/$25,000)
The OBBBA offers an above-the-line deduction for qualified overtime pay for tax years 2025 through 2028, which is capped at $12,500 for single filers or $25,000 for joint filers, with phase-outs starting at $150,000/$300,000 in modified adjusted gross income. This deduction applies to overtime compensation required under the Fair Labor Standards Act, thereby benefiting hourly staff. Employers must report overtime pay separately on Form W-2 to enable employees to claim this deduction.
Other OBBBA Financial Provisions Impacting Hotels
- Work Opportunity Tax Credit (WOTC) Expansion: The Work Opportunity Tax Credit has been expanded, providing tax credits for hiring employees from groups like veterans or those from economically disadvantaged backgrounds. For hotel owners, this can lower payroll taxes and reduce labor costs.
- Section 199A Qualified Business Income (QBI) Deduction: The 20% QBI deduction for pass-through entities (e.g., LLCs, S corporations) is now permanent, with increased phase-in thresholds of $75,000 for individuals and $150,000 for joint filers. This benefits hotel owners operating as pass-through entities by reducing taxable income.
- Research and Development (R&D) Expensing: Costs can now be fully deducted in the year incurred, effective for tax years beginning after December 31, 2024. If a hotel invests in innovative technologies or processes, this provision could enhance deductions.
- State and Local Tax (SALT) Deduction: The SALT cap is increased to $40,000 for 2025–2029 for individual taxpayers with adjusted gross income below $500,000, thus preserving workarounds for pass-through entities. This can reduce the overall tax burden for ownership with careful tax planning.
Action Steps for Your Hotel Company
There are a few actionable steps you can take to capitalize on the potential opportunities presented in these new provisions:
- Conduct a Cost Segregation Study: Engage a professional to help identify assets eligible for accelerated depreciation when planning to remodel, expand, construct or even purchase an asset.
- Review Capital Expenditure Plans: Accelerate qualifying purchases or renovations in 2025 to leverage 100% bonus depreciation and Section 179 expensing.
- Model Cash Flow Scenarios: Consult with a tax professional to assess the impact of bonus depreciation, Section 179, Section 163(j) and QBI deductions on your tax liability.
- Update Payroll Processes: Ensure tips and overtime pay are reported separately on Form W-2 so employees can claim deductions.
- Stay Updated: Monitor potential tax law changes and state tax conformity issues.
The OBBBA provisions present a rare opportunity to significantly reduce your hotel’s tax burden while freeing up capital for growth.Whether you’re planning renovations, expanding operations or simply looking to optimize your financial strategy, these updates offer powerful tools to enhance profitability. By acting now and working closely with your tax advisor, you can ensure your hotel is positioned to fully benefit from these changes and stay ahead in a competitive market.
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For more information on this topic, please contact a member of Withum’s Hospitality Services Team.
