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LMSB-04-0807-054 "This document is not an official pronouncement of the law or the position of the Service and cannot be used, or cited, or relied upon as such."
History of Hotel Industry Trends Industry Terms Accounting Principles Information Systems Industry Operating Procedures Government Regulatory Requirements
A. Federal Requirements B. State Requirements C. Local Requirements
Appendix
C. Acknowledgment
This guide was primarily drafted by: James Johnston, Senior Program Analyst, RFPH Phil Hofmann, Technical Advisor for Food, Restaurants and Hospitality Paul Knap, Counsel, Milwaukee, WI John Lelko, Team Coordinator, Chicago, Illinois Cindy S. Kim, Senior Program Analyst, RFPH We appreciate all their hard work and also that of others that were contacted for their input into this document.
721100 Travel Accommodations 721110 Hotels (except casinos) & Motels 721120 Casino Hotels 721191 Bed & Breakfast Inns 721199 All Other Traveler Accommodation 721210 RV (Recreational Vehicle) Parks & Recreation Camps 721310 Rooming & Boarding Houses
The hotel industry may also have related activities including restaurants and cafes, gambling, sports and recreation, theme parks, retail operations, and other entertainment. Additionally, some members of the industry have expanded into long-term care.
Resort Hotels are the planned destination of guests, usually vacationers. This is because resorts are located at the ocean or in the mountains away from inner cities. Resort hotels may offer any form of entertainment to keep their guests happy and busy. A summary of key events in the history of the industry would include the following: While the practice of renting space to travelers stretches back to antiquity, what could be considered the modern concept of a hotel derives from 1794, when the City Hotel opened in New York City. While the practice of renting space was not new, the City Hotel was purported to be the first building devoted exclusively to hotel operations. For its time, the building was quite large and possessed 73 rooms. Similar operations soon appeared in such nearby cities as Baltimore, Boston and Philadelphia. Interestingly, New York Citys first skyscraper was a hotel - the six story Adelphi Hotel. Hotels took a distinct step up in style and class when the Tremont House opened in Boston in 1829. This hotel was considered by many to be the beginning of what was regarded as first class service. With 170 rooms, the Tremont House was a large facility. In addition, the hotel offered features which, for the time, were amazing. Private single and double rooms were available, which offered not only privacy, but also security. In addition to water pitchers and a washing bowl, free soap was provided in each room. The Tremont House offered French cuisine and, reportedly, was the first hotel to have a Bellboy. In 1908, the Buffalo Statler opened, marking the beginning of the modern commercial hotel era. Many services now considered standard were introduced by the Statler, including such amenities as a light switch next to the door, private bathe, ice water and a morning newspaper. The Statler set the standard of the day by being clean, comfortable and affordable. The Statler served as the pattern for hotel design and operation for many years. In the 1920s, hotel building entered a boom phase and many famous hotels were opened, including the Waldorf Astoria, New Yorks Hotel Pennsylvania, and the Chicago Hilton and Towers, which was originally named the Stevens. Motels began to replace roadside cabins as use of the automobile spread throughout society. Offering clean rooms with adjacent parking, motels enjoyed great popularity with the traveling public. In the 1950s and 1960s, the practice of franchising appeared within the industry. Franchising enabled entrepreneurs to expand their operations without the use of substantial capital. For much of their history, hotels were owned and operated by individuals. However, as franchises and chains began to appear, individually owned hotels found themselves increasingly at a competitive disadvantage. By the 1960s, independent prospects began to improve as the result referral organizations such as Quality Courts, Best Western, Master Host and Best Eastern. From the 1980s forward, mergers and acquisitions became common within the industry, and brands become hotly traded commodities. Recently, use of management companies has entered the mainstream. As a result, many chains are more involved in management than in ownership. These chains realize a much more predictable and steady income stream than had normally been yielded by ownership.
Trends
In the 1980's there was extensive merger and acquisition activity between hotel and non-hotel companies. Many companies are now selling specific brands in an effort to get back to their core business. Another trend in the hotel and beverage industry is paperless inventory systems. Improvements in scanning equipment have made this possible. In many instances, ordering, delivery, payment and stocking are all initiated and accomplished by software prompted by information captured by scanning equipment with very little human involvement. Some chains have sold ownership in their hotels to foreign investors while still maintaining control. This provided the capital that was needed for further expansion. REITs (Real Estate Investment Trusts) have been created to allow smaller investors to participate in mortgages and equities. Product segmentation has become more popular. Luxury and first class hotels have created more amenities and products for their customers while economy and budget motels have cut back services in order to maintain lower prices. Also specialized extended stay and suite hotels have become more popular. Hotels with indoor water parks are one of the newest trends. Timeshares is another segment that many hotel companies are involved with recently. The development, sale, and management of timeshares have become particularly popular with the large chains. Franchising continues to flourish in the hotel industry. Audit issues cover a variety of areas, as would be expected. In addition to matters such as cost segregation, which impact numerous industries, hotel companies have undertaken such activities as donating used bedding as they upgrade their equipment, using trusts to defer income, delaying recognition of last day of the year receipts, franchising, condo conversion, and so forth. Several years ago, customers generally called a toll-free number to make room reservations. In 2006, about 50% of hotel rooms were booked through the internet. The number of domestic hotel rooms reserved for smokers is declining as major hotel chains are beginning to decrease their total number of smoking rooms or becoming non-smoking facilities altogether. Other recent trends in the industry include luxury mattresses, complimentary breakfast, high definition TV, high speed internet access, Wi-Fi (wireless internet access), and room suites. A recent 2006 trend is hotels re-imaging their lobbies to destination places. For example part of the lobby may be used for a breakfast area in the morning and a bar at night. This may include sliding walls, decorative lighting, and music. One reason for this is to generate more income per square foot. A July 2005 article from Knight Ridder Newspapers[2] highlights what the major chains are upgrading in the sleep department. The article provided the following information:
Marriott International has been replacing mattresses at its Marriott and Renaissance hotels for several years and is adding new bedding at its 2,400 hotels, including higher thread count sheets,
down comforters and duvet covers at a cost of $190 million. Hilton Hotels is introducing new bedding across its brand, including Hilton, Doubletree and Embassy Suites. There will be higher thread count sheets, plush top mattresses, extra pillows and user friendly clocks. Crown Plaza replaced some 50,000 beds and bedding in 2004, hired a sleep doctor for advice on relaxation, and tossed in a sleep kit for guests. Radisson in 2004 began moving in custom-designed Sleep Number beds at 230 of its hotels and resorts, with most of its 90,000 beds to be replaced by 2006. New bedding is also included in the makeover. Hyatt recently rolled out its Grand Bed, a 13 inch pillow-top mattress, and added more luxurious linens and decorative pillows. Starwood Hotels announced the debut of a new bed at its moderately priced brand, Four Points by Sheraton. The Four Comfort Bed, a $13 million investment, joins the Heavenly Bed and Sheraton Hotels Sweet Sleeper Bed in Starwoods lineup. Red Roof Inns will offer pillow top mattress pads, 230 thread count sheets and hypoallergenic pillows at select hotels.
Some Best Western hotels will add new mattresses, comforters, feather pillows and triple sheeting.
[2] Martinez, Michael. Hotels Compete To Give You The Comfiest Night's Sleep. The Wichita Eagle. 10 July 2005. H3.
Industry Terms
Industry Term ADJOINING ROOMS AFFILIATE RESERVATION SYSTEM Definition or Explanation Guestrooms located side by side without a connecting door between them. A hotel chain's reservation system in which all participating properties are contractually related. Each property is represented in the computer system database and is required to provide room availability data to the reservation center on a timely basis. AFFILIATED HOTEL A hotel that is a member of a chain, franchise, or referral system. Membership provides special advantages, particularly a national reservation system. Service or item offered to guests or placed in guestrooms for the comfort and AMENITY convenience of guests, and at no extra cost. Examples are various guest services (such as in-room entertainment systems, automatic check-out, free parking, concierge services, and multilingual staff) in addition to an array of personal bathroom items offered by most hotels and motels. Amenities are designed to increase a hotel's appeal, enhance a guest's stay, and encourage guests to return. A guestroom floor configuration in which rooms are laid out off a single-loaded ATRIUM corridor encircling a multistory lobby space; also the multistory lobby space, usually with a skylight. A ratio that shows the average number of paid guests for each room sold. AVERAGE OCCUPANCY PER Calculated by dividing number of paid room guests by number of rooms sold. Measures management's ability to use the lodging facilities. ROOM A ratio that indicates average room rate, and to what extent rooms are being upAVERAGE ROOM sold or discounted; calculated by dividing rooms revenue by number of rooms
RATE BANQUET
A meal prepared for a particular group, for which the number of guests and the menu are predetermined. Most properties offering banquet service have special facilities for banquet food production and service. The trading of merchandise instead of paying cash. (e.g. advertising) BARTER A small inn or lodge that provides a room and a breakfast. Often a B&B is in a BED & residential home setting and/or a historic building converted to a quaint lodging BREAKFAST (B&B) facility. The person responsible for charging to hotel guests all vouchers representing BILLING CLERK food, beverages, room service, and merchandise purchases. CALL ACCOUNTING A system that is part of the telephone equipment that prices telephone calls made by hotel guests and sends the information to the property management system (PMS) for billing. SYSTEM A hotel that features legal gambling, with the hotel operation subordinate to the CASINO HOTEL gambling operation. Part of an affiliate reservation network. A central reservation office typically CENTRAL deals directly with the public, advertises a central (usually toll-free) telephone RESERVATION number, provides participating properties with necessary communications OFFICE equipment, and bills properties for handling their reservations. CHAIN OPERATING A firm that operates several properties, such as Holiday Inn Worldwide or Hilton Hotels Corporation. Such an operator provides both a trademark and a reservation COMPANY system as an integral part of the management of its managed properties. The procedures for a guest's arrival and registration. CHECK-IN (1) The procedures for a guest's departure and the settling of his or her account. CHECK-OUT (2) A room status term indicating that the guest has settled his or her account, returned the room keys, and left the property. A property, usually located in a downtown or business district, that caters COMMERCIAL primarily to business clients. HOTEL COMPLIMENT-ARY A complimentary or "comp" room is an occupied room for which the guest is not charged. A hotel may offer comp rooms to a group in ratio to the total number of ROOM rooms the group occupies. One comp room may be offered for each fifty rooms occupied, for example. A hotel in which an investor takes title to a specific hotel room, which remains in CONDOMINIUM the pool to be rented to transient guests whenever the investor is not using the HOTEL room. The investor expects to receive a gain from the increase in value of the hotel over time, as well as receive ongoing income from the rental of his or her room. Any arrangement by which a product or service is brought to public notice over Cooperative the names of both the supplier and any intermediary who comes between that advertising supplier and the ultimate purchaser. The intermediary may be a retailer who buys a product for resale, a distributor who sells to retailers or other form of intermediaries. This arrangement results in consumer advertising as well as other forms of promotion. The cost of the promotion may be shared by the supplier and the intermediary, or the supplier may pay all costs. The process commonly involves reimbursing retailers for advertising they create and place. Hotel organization that has its own brand or brands, which may be managed by CORPORATE the corporate chain or by a conglomerate. HOTEL CHAIN
GENERAL MANAGER HOSPITALITY INDUSTRY HOTEL INDEPENDENT HOTEL LATE CHARGE MID-PRICE/ EXTENDED-STAY HOTELS
The chief operating officer of a hotel. Lodging and food service businesses that provide short-term or transitional lodging and/or food. A large lodging facility, generally a hotel is full service and a multi-story building with interior entrance guest rooms. A hotel with no chain or franchise affiliation. It may be owned by an individual proprietor or a group of investors. Charged purchase made by a guest that is posted to the guest's folio after the guest has settled his or her account. Hotel that caters mostly to persons who must be in an area for a week or longer. The guestrooms of mid-price/extended-stay hotels have more living space than regular hotel guestrooms, and may also have cooking facilities. Guestrooms in these hotels tend to be less expensive than guestrooms in full-service or all-suite hotels. The percentage of available rooms occupied for a given period. Computerized systems that retail outlets such as restaurants, gift shops, etc, enter orders and maintain various accounting information. The POS generally interfaces with the property management system (PMS). A computerized front desk system that manages hotel room inventory, guest billing and interfaces with various other systems such as telephone, call accounting, point of sale (POS), entertainment, etc.
Occupancy POINT OF SALE SYSTEM (POS) PROPERTY MANAGEMENT SYSTEM (PMS) PROPRIETARY BOOKING ENGINE
A internet reservation system that is owned and operated by an individual hotel or group of hotels to allow them to take reservation on their own website without paying a fee to the GDS, third party booking engines or franchise reservation systems. The current public rate quoted for each accommodation as established by the RACK RATE property's management. However, most rooms are discounted. (i.e. rented at less than the rate rack) A guestroom that being held under an individual or business' name at a particular RESERVATIONS hotel for a specific date or range of dates. A hotel, usually located in a desirable vacation spot, that offers fine dining, RESORT HOTEL exceptional service, activities unavailable at most other properties, and many amenities. ROOM OCCUPANCY A device that uses infrared light or ultrasonic sound waves to sense the physical occupancy of a room. Sensors have the ability to turn on devices and appliances SENSOR such as lights, air conditioning, and heating whenever a guest enters a space, and to turn these devices and appliances off when the guest leaves. A card index system that is constantly updated to reflect occupied and vacant ROOM RACK rooms. In the evening, the room rack contains forms for only those registered guests remaining for the night who are to be charged for rooms. A daily room report can be prepared from the room rack. A front office application of a computer-based property management system. The ROOMS module (a) maintains up-to-date information on the status of rooms, (b) assists in MANAGEMENT the assignment of rooms during registration, and (c) helps coordinate various MODULE guest services. SERVICE CHARGE A percentage of the bill (usually 15% to 20%) added to the guest charge for
distribution to service employees in lieu of direct tipping. An internet site that provides a booking engine where a traveler can search a large THIRD PARTY number of lodging facilities for availability and reserve a room. The lodging BOOKING facilities are not affiliated with the site and pay a fee for the business that the ENGINE third party site generates. Examples of third party sites include: hotels.com, priceline.com. Transient Occupancy City or County tax added to the price of a hotel room. Tax A hotel that offers large recreational water elements such large pools, multiple WATERPARK pools, slides or other water related venues. HOTEL back to table of contents
Accounting Principles
The lodging industry was reportedly one of the first industries to develop definitive standards to provide specific guidance to accountants and operators. The standards evolved because uniformity of layout and presentation were, and are, still not stressed under U.S. Generally Accepted Accounting Principles (GAAP). [3]; Those standards were and are contained in the Uniform System of Accounts for the Lodging Industry (USALI), which is published by the American Hotel and Motel Association. [4] While the accounting profession may not have seen fit to develop GAAP standards specifically applicable to the lodging industry, the USALI has been widely adopted within the industry. Although there is no requirement that a lodging operator use the USALI, the degree of compliance with this time-tested, turnkey system is substantial. The primary reason for widespread adoption of the USALI has been comparability. Lodging operators tend to use financial statement data generated by competitors as a benchmark against which to measure their own operations. If comparability is lacking, then there are no benchmarks. Additionally, while the system was developed for use within the United States, many hotel operators around the world have adopted the USALI. Financial statements prepared for external users, are based on GAAP. In addition to other items commonly found in most financial statements, lodging industry financials are likely to report on such items as China, Glassware, Silver, Linen, and Uniforms (CGSLU), and the House Bank. The USALI is a highly departmentalized system of accounting, and includes Departmental Statements of Income. There are two main department classifications in a hotel: operating and overhead. The operating (revenue-producing) departments include rooms, food and beverage, telecommunications, and similar departments. The overhead departments include administrative and general, data processing, human resources, transportation, marketing, guest entertainment, energy costs, and property operation and maintenance. The USALI itself provides for up to 30 departmental statements, which include, in addition to those already mentioned: telecommunications, garage and parking, golf shop, golf pro shop, guest laundry, health center, swimming pool, tennis, tennis pro shop, other operated departments, rentals and other income, human resources, information services, security, franchise fees, management fees, rent, property taxes and insurance, interest expense, depreciation and amortization, income taxes, house laundry, salaries and wages and payroll taxes and employee benefits.
The principal differences between a hotels transactions and internal control and those of other businesses are found in the revenue cycle. Room revenue is the most important source of income to a hotel. The front desk is the center of the hotels operation and the place where the guest ledger, which summarizes and accumulates all charges to guests using the hotel facilities, is maintained. Some of the functions performed by front desk personnel are registering guests, recording room revenue, recording food and beverage and other guest charges, checking out guests, and settling guests bills. There are numerous articles and books that further explain the hotel business. For more information, refer to Montgomerys Auditing by OReilly,Vincent M., et al., Twelfth Edition. new York: Wiley, 1998. Montgomerys Auditing recommends the following substantive tests for room revenue for financial statement purposes:
Review reconciliations of rooms occupied per the front desk to the housekeepers daily inspection report or the exception report Compare the room rate charged on the guest folio with that on the guest registration and room rack for a selected number of folios Trace room charges to guest folios and compare with established rates Trace cash receipts to the cashiers report and the cash receipts journal
Determine that adjustments (credits) made to guests accounts in connection with overcharges, disputed charges or rate changes were properly approved Review supporting documentation for propriety Trace credit postings to individual guest folios
From a tax audit standpoint, the available descriptions of hotel operations would seem to suggest considerable opportunity for manipulation of both revenue and expenses. Room rates vary considerably depending on a variety of factors - e.g., group rates versus individual rates, etc. The occupancy rate would appear to be another area of potential concern. While these concerns may not be overly great in the case of publicly traded companies who have to undergo an audit in the post Sarbanes-Oxley atmosphere, there may be of considerable concern with nonpublicly traded companies. Additionally, one of the newest areas that is gaining significance in the industry is the barter transaction. A barter transaction occurs when a property agrees to provide accommodation and/or other services in exchange for external services, for example advertising. While USALI recognizes barter transactions as executory contracts that do not need to be recorded in the financial statements until service is provided or received, it suggests that to provide more complete information for decision-making, the internal records reflect the transaction by recording an asset and a liability at the time the barter transaction is negotiated. The value assigned to this transaction should be a conservative average of the market rate for similar accommodations or services at the property, per the USALI.[5] When services are provided by the property, revenues are recorded and charged to the barter liability. On the other side, the expense is offset against the barter asset account when the service is received. For external reporting purposes, USAL suggests that the asset and liability accounts be netted and reflected as a current asset or liability. This will result in revenues and expenses associated with the barter transaction being reported in different periods. [6] Ratio analysis, in general, comprises the same types of ratios used in almost any industry. However, there
are a few industry specialized ratios peculiar to hotels and/or restaurants of which one should be aware.
Average Room Rate = Rooms Revenue divided by Paid Rooms Occupied. Average Food Check = Total Food Revenue divided by Number of Covers. Covers refer to guests served in the food operation during the period.
A key recent addition is RevPar, which stands for Revenue per Available Room. It is calculated as either: Rooms Revenue divided by Rooms Available for Sale, or as Rooms Revenue divided by Rooms Available. The USALI expresses a preference for the second computation because [t]he purpose of the ratio is to determine whether the inventory of rooms is being managed optimally. Therefore, the denominator should also include rooms out of order and temporary house use rooms.[7] The USALI also discusses a sample chart of accounts, which uses a twelve-digit numbering system, consisting of four clusters of three digits each. The first three digits are the property number. The second three digits are the revenue departments or cost centers. The third three digits are the major accounts on the balance sheet or income statement and the final three digits are sub-accounts useful for analysis and control. Obviously, this may vary considerably from taxpayer to taxpayer. The descriptions contained in this guide only scratch the surface of standard practices within the hotel industry which are either unique to the hotel industry, or are uncommon in most other industries. A partial listing of available publications is provided elsewhere within this guide should additional information be required.
[3] Popowich, Taylor, and Daria Sydor. "Uniform System of Accounts for the Lodging Industry: Are you up to Date?" The Journal of Hospitality Financial & Technology Professionals. Volume 12, Number 7 (October/November 1997). 28 June 2007 http://www.hftp.org/members/bottomline/backissues/1997/OctNov/index.html. [4] Hotel Association of New York City, Inc. Uniform System of Accounts for the Lodging Industry. Ninth Revised Edition. Lansing, MI. Educational Institue of the American Hotel & Lodging Association. 1996. [5] Popowich, Taylor, and Daria Sydor. "Uniform System of Accounts for the Lodging Industry: Are you up to Date?" The Journal of Hospitality Financial & Technology Professionals. Volume 12, Number 7 (October/November 1997). 28 June 2007http://www.hftp.org/members/bottomline/backissues/1997/Oct-Nov/index.html. [6] Ibid. [7] Ibid.
Information Systems
The following are examples of some of the information system products that are available to hotel operators: LodgingTouch Property Management System (by Hotel Information Systems)[8] The system is divided into various modules which can interact with the front office, group sales, guest history, accounts receivable, travel agencies, and yield management. Hoteliers can search and retrieve guest information by various fields, including name, address, confirmation numbers, and other fields. In addition, the system allows users to search for accounts using any criteria. Paragon AS/400 Front Office System (by Hotel Information Systems)[9] Planning for a guests stay includes managing accommodations, aggressive pricing, marketing, forecasting, and implementing reporting controls. The Paragon system claims a flexible system that provides information in order to achieve optimal standards. The system provides information and feedback to measure financial impact and quality. Paragon can manage the complete hotel system. Paragon can be integrated with Paragon Back Office, Central Reservations, and complementary products. Some benefits claimed by the Paragon include improved customer service, efficient internal operations, and control over financial data integrity. Other key features include:
Easy reservation input Optimal return on rooms by providing flexible rate configuration and maximum room occupancy Access availability by room type, total hotel and group. Provide confirmation letters and pre-printed registration cards. Capture additional guest information through hotel configurable fields. Maintain wait lists Provide flexible package configurations.
CLS Software Property Management System (by Hotel Information Systems)[10] This system can support properties of all sizes, from 50 to 1,000 rooms. They also claim a comprehensive integrated modular system that links together all aspects of the hotel function. The system comes in domestic and international versions. Other key features include:
Ease of data entry Over 200 interface solutions Technical Support - 24-hours a day, 7-days a week, 365-days a year Over 25 years of experience.
Hotel Information Systems epitome Project Management System for UNIX Hotel Information Systems offers a wide variety of other hotel management systems, namely, epitome Project Management System for UNIX. This system can be utilized with the hotels current IT system. _________________
[8] E-hospitality.com. 28 June 2007. < http://www.e-hospitality.com/storefronts/hotelinfo.html> [9] Ibid. [10] Ibid. back to table of contents
The Federal Trade Commission (FTC) publishes the rulebook for promotional allowance marketing, titled Guides for Advertising Allowances and Other Merchandising Payments and Services, these guides are usually referred to as The Guides, the FTC Guides or the Fred Meyer Guides. Text of the Americans with Disabilities Act, Public Law 336 of the 101st Congress, enacted July 26, 1990. The ADA prohibits discrimination and ensures equal opportunity for persons with disabilities in
employment, State and local government services, public accommodations, commercial facilities, and transportation. It also mandates the establishment of TDD/telephone relay services.
B. State Requirements
Each state has their own specific requirements and regulations regarding the manufacture, sale, resale, and consumption of alcoholic beverages.
C. Local Requirements
Many localities have controls over the purchase, sale, resale and consumption of alcoholic beverages.
Deferral of Gift Card Sales Are taxpayers properly following the rules for deferral under Treas. Reg. 1.451-5? Is a CAM required? Was an information schedule attached to the tax return? Is income from unredeemed gift cards brought into income after 2 years? Was a separate company set up to manage the program? Can the taxpayer track the outstanding liability? Guest Loyalty/ Reward 1. What is the proper character of a reward point? Is a reward point a rebate Programs or refund as provided in Treas. Reg. 1.461-4(g)(3) or a trading stamp or premium coupon as provided in Treas. Reg. 1.451-4(a)? The characterization will affect the timing of expense recognition. Whereas a trading stamp or premium coupon may reduce gross income at the time of the corresponding sale, a rebate or refund will not reduce gross income until payment is made to the person to which the liability is owed. Furthermore,
when is the liability fixed: at the time a customer is issued or redeems a reward certificate? 2. What is the cost of a reward point? How was the estimated average cost of redeeming each point computed? Did the retailer include only the costs to acquire the merchandise, cash, or other property required to redeem the points, or did the taxpayer include other costs such as advertising catalogs, transporting and storing merchandise, operating redemption centers, etc.? 3. What methodology was used to estimate future redemptions? Does the methodology result in a reasonably accurate estimate of the points outstanding at the end of the taxable year that will ultimately be presented for redemption? Although an expense may be deductible before it is due and payable, the liability must be firmly established. Is the liability fixed prior to the customers accumulation of the minimum number of points needed to earn a reward certificate? Does the methodology take into consideration any expiration of previously earned points? 4. Does the recurring item exception provided under Treas. Reg. 1.461-5 apply if the reward certificate is determined to constitute a rebate? Many hotels are the subject of cost segregation studies. An Audit Technique Guide (ATG) for the preparation and examination of cost segregation studies was initially issued in April 2004 and was most recently updated in January 2006. The primary goal is to provide examiners with an understanding of why cost segregation studies are performed by taxpayers, how such studies are prepared, and what to look for in the review and examination of these studies. This guide will also assist taxpayers and practitioners in understanding some of the items the Service will consider to support property allocations based on these studies. Included in the ATG is industry specific guidance for land-based casinos, restaurants, and retail establishments which were previously issued as Industry Director Directives. It should be noted that this ATG is not an official Service pronouncement and may not be cited as authority. Some of the problems encountered during examinations are as follows:
Contribution made to an organization that is not a qualifying organization. Fair market value (this is the area where most disputes between the taxpayer and the Service occur).
WOTC/WTW Claims
Tax Abatements
Rev. Rul. 2003-112 provided guidance on whether an individual meets the family membership requirements permitting certification for the WOTC and WTW credits. Some states may have applied a narrower definition in issuing certificates. Many taxpayers are currently filing claims using the revenue ruling as justification. These claims SHOULD NOT be allowed without proper substantiation. The current Service position is that additional credit should only be allowed when the taxpayer has documented certification from the state agencies. At issue is the proper tax treatment on State & Local Economic Development Subsidies. This might include inducements & Enticements to persuade companies to relocate or maintain their investment in that particular
area. Some taxpayers are taking the position that they are entitled to a deduction for a tax abatement. Further, they account for the abatement as income under IRC 118 and then reduce basis in long life assets or land under IRC 362. This accounting treatment is an emerging issue in all industries. Should a taxpayer be allowed a credit under section 45B on Service Charges allocated to servers? Should a taxpayer be allowed a credit under section 45B on both directly tipped and indirectly tipped employees? Should a taxpayer be allowed a credit under section 45B for the difference paid for minimum wages for the first 90 days for employees under age 21? These are some of the issues that hotels with restaurants will face. When a service fee is charged by the restaurant, typically on large parties, banquets, or catering, these amounts are not eligible for the FICA tax tip credit under IRC 45B. Some hotels are requiring nonrefundable franchisee fees upfront, perhaps several years before the franchisees actually get their hotels. When examining franchisers, you should inquire as to their policy for reporting these advance fees. Some are properly including them in income and some are not. In some situations vendors will enter into long term agreements with hotels. These contracts typically call for a large up-front payment from the vendor to the hotel. In return the recipient agrees to purchase product for a given time period or the recipient agrees to purchase a stated amount of product in the future with no time period mentioned. The contracts will usually stipulate that the vendor will either be the exclusive supplier of the product or that the vendor is the primary vendor and will receive preferential placement of the product for an extended period of time. Typically in hotels you may see this from the soft drink provider. The principal issue is whether costs incurred to influence legislation that impacts a taxpayer's business or industry are deductible as ordinary and necessary business expenses under IRC 162(a). The general audit approach is to determine if the activity is covered by IRC 162(e). If yes, no deduction is permitted. If no, the activity is deductible to the extent it meets the requirements of IRC 162(a). Generally, IRC 162(e)(1) provides for no deduction of amounts paid or incurred in connection with any of the following four activities: 1. "Influencing legislation" (i.e., direct lobbying of the legislature); 2. Participating in a political campaign of a candidate for public office; 3. Attempting to influence the public regarding elections, legislative matters, or referendums (i.e. grassroots lobbying); or; 4. Communicating with "covered executive branch officials." Treas. Reg. 1.162-29 defines "influencing legislation" as any attempt to influence legislation through a lobbying communication and all ancillary activities engaged in for the purpose of making or supporting a lobbying communication.
Franchising Fees
Upfront Payments
Lobbying Deductions
One area that is often overlooked is dues paid to trade associations. The following website allows you to search by company name and see who is registered to lobby on the company's behalf and the amount of lobbying-related income from the company/client. http://sopr.senate.gov.
Current Current
Retroactive Revenue Ruling discusses year end accruals relating to outstanding liability a Ruling 98-39 manufacturer has under cooperative advertising arrangements with retailers, specifically the ruling states that the fact of liability is established when a retailer conducts qualified advertising vs. when a claim for reimbursement is received from the retailer. Revenue Ruling 98-39 was the desirable method of announcing that the Service has changed its position on the issues addressed in TAMs, 9320001, 9343006, 9204003 and 9416004. 2002 Revenue On January 7, 2002, the Service issued guidance (Rev. Proc. 2002-12) on a safe
Procedure 2002-12
harbor method of accounting for the cost of smallwares for restaurants. The IRS will now allow for the cost of certain restaurant smallwares to be current year deductible expenses.
1999
2001
B. Trade Associations
Name Address Purpose, Goals, Objectives, etc. International Hotel 48, Boulevard de Non-profit organization which represents industry issues before & Restaurant Assn. Sebastopol, 75003 policymakers, monitors tourism issues, creates programs to serve Paris, France the industry, etc. American Hotel & 1201 New York Represents lodging industrys business interests on Capitol Hill. It Lodging Assn Ave, NW, #600 is the largest national trade association for the U.S. hotel and Washington, DC lodging industry. 20005-3931 Hotel Tax None Organization is affiliated with the American Hotel & Lodging Executives Assn.s governmental affairs unit. Committee Tax Executive 1200 G. St. Suite A professional organization of business executives who are Institute 300 responsible for taxation matters on an administrative or Washington, DC policymaking level, or whose work is otherwise primarily 20005-3814 concerned with the problems of business taxation.
E. Industry Books
Date of Title Latest Edition 2004 Hospitality Sales: Selling Smarter by Judy A. Siguaw and David Bojanic, Publisher: Thomson Delmar Learning 2004 Hospitality Strategic Management: Concepts and Cases by Jeffrey S. Summary of Contents
This book provides a practical view of the field. It provides the reader a glimpse into the strategic managers
2002
2001
1995
1995
1993 1991
1988
Annual
role, including acquisition, development, and management of internal resources, in addition to relationships with external stakeholders. Hospitality Management Accounting As the hospitality industry continues to grow and become by Martin G. Jagels and Michael M. more competitive, it must become increasingly profit and Coltman, Publisher: Wiley cost-conscious in order to maximize revenue and minimize costs. This book combines essential information, illustrative examples, and useful problems and exercises. th Convention Sales and Services, 6 This book provides a guide in reaching and servicing the Edition by Milton T. Astroff and meetings market. The book provides a step-by-step James R. Abbey, Publisher: Culinary process to both sell and service to groups. and Hospitality Industry Publications Services Hospitality & Travel Marketing by The book provides a thorough and current look at Alastair M. Morrison, Publisher: marketing theory and techniques for the hospitality Delmar industry. It provides a glimpse into the collaborative efforts between hotels, airlines, restaurants and travel agencies. Hospitality Accounting by William This book addresses the practical accounting requirements S. Gray, Publisher: Prentice Hall for some of the latest developments in hotel operations. It looks at all phases of hospitality accounting and finance from basic recording to long-range projections. Co-Op Advertising by Bob Houk, The book describes marketing activities, development of available from the Association of marketing budgets, cost controls, marketing jargon, legal National Advertisers considerations for price structures, etc. Helps the reader understand the motivations and internal procedures relative to marketing strategies. Great Advertising Campaigns Discusses successful marketing strategies, brand building, etc. Internal Control: A Fraud-Prevention Self-explanatory. Handbook for Hotel and Restaurant Managers by A. Neal Geller, Publisher: Negotiation and Administration of Self-explanatory. Hotel Management Contracts by James Eyster, Publisher: Thomas Hotel Registry Lists companies and their products and brands, d/b/a names and other statistical information.
1993 2001