Presented at The Michigan Lake to Lake B&B Association Conference– 10/24/11

Bob Fuehr
The Inn Broker, Inc.

Disclaimer: Mr. Fuehr is a licensed, Michigan real estate broker.  He is not an appraiser, attorney, accountant or other licensed professional. You should use the information presented as topics for discussion with your appropriate licensed adviser.

Property Taxes; Michigan Taxpayer’s Guide

  1. Property Tax assessment is based on the real estate; not the furnishings or biz.
  2. Taxable vs. State Equalized Value (S.E.V.)
    1. Taxable Assessment can only increase the lower of the rate of inflation or 5%
    2. Adjustments to the taxable assessment can be made for changes to the bldg. or to correct errors.
    3. Assessments cannot exceed 50% of true cash value.
  3. MI B&B Principal Residence Exemption
    1. Determination of % of 18 mills exemption:
      1. Property exclusively used for personal purposes (property not available to guests) –100% exempt
      2. Property exclusively used for business purposes (property dedicated to guests)–0% exempt
      3. Common areas – 50% exempt/ 50% nonexempt
      4. Unlike Federal guideline, no consideration of % of year open for business.
      5. The application of these guidelines, adopted in 2006, varies greatly by area.
    2. Pop-up Tax
      1. When a property is sold, the property tax assessment “pop-ups” to the S.E.V. for the new  owner. Some new B&B owner’s property tax bills have quadrupled over the previous tax bill!

I.R.S. Tax issues

  1. Personal vs Business use of bldg
    1. Only the % of bldg. area used exclusively for the business (not common areas) may be deducted as a business expense. That amount may be further reduced by the % of days of the year that the B&B is open for business.
  2. Sale of the B&B:
    1. Per Internal Revenue Code Section #121, the portion of the B&B bldg. that was allocated as personal space, may be excluded from capital gain tax for up to $250K  individual or $500K/couple.
    2. Allocation of Value: Sellers will submit an IRS Form #8594 after the sale. Both parties should agree on these values prior to closing. This allocation of sale price becomes the seller’s ending book values and the buyer’s beginning book values. Be reasonable; a tax  audit is usually more expensive than any tax benefit that may be incurred by an  aggressive accounting approach.
      1.    This will incl. an allocation of sale price:
        1. Land- Obtain from appraisal
        2.   Land Improvements- Gazebo, storage bldgs.; insured value
        3. Bldgs.- Obtain from appraisal
        4. Personal Property- Insured value of furnishings & eqmt.
        5. Non-Compete Covenant– Minimal value; usually $5-$10K
        6. Goodwill- Is the difference between the sum of the hard assets listed above and the sale price.
          1. Example of a B&B allocation of value:
            1. Land                                    28K
            2. Land Improvements            5K
            3. Buildings                         365K
            4. Personal Property            50K
            5. Non-Compete Agmt.         15K
            6. Goodwill                                5K     
            7. Total                                 $468K
    3. Depreciation Recapture
      1. All those years that innkeepers took a depreciation deduction most of which will be paid back at the earned income tax rate; not at the current capital gains rate.
    4. Payroll Issues
      1. The I.R.S. is targeting L.L.C.’s & Sub-S Corps. for owners who are taking mostof their profit as distribution and not paying a “reasonable wage” & withholding.
      2. Most regular B&B staff are employees and are covered under the Wage & Hour Act (& withholding) regardless of how much of an “independent contractor” that they may appear to be. Most B&B staff are not salary-exempt from min. wage &  overtime pay. The value of any room and board is considered as a job requirement  and is not included as part of wages to meet min. wage requirements; however, it is included in overtime, unemployment tax and worker’s compensation calculations.