Hotel and Motel Taxes: Occupancy Taxes, the Franchise Flag, the PIP Renovation, and the Cost Segregation That Makes the First Year

A hotel is a building that is also a business, and the return follows both. The property — thirty-nine years, and the study that changes it: a hotel is nonresidential real property (thirty-nine-year straight-line) — not residential rental property, because a dwelling unit excludes a unit in a hotel, motel, or other establishment more than half of whose units are used on a transient basis (the short-term rental taxes guide's point, from the other side); the land is not depreciable (a purchase price is allocated between land and building with an appraisal); and a hotel is the textbook cost segregation case (the cost segregation guide) — the guest room furniture, the case goods, the carpet, the wall coverings, the televisions, the beds, the kitchen and laundry equipment, the lobby's décor, the fitness room, the pool equipment, the signage (five- and seven-year property), and the parking lots, the landscaping, the site lighting, the pool itself, and the sidewalks (fifteen-year land improvements) — often 25 to 40 percent of a hotel's building basis — are reclassified and, with bonus depreciation, expensed in the year of purchase; a hotel acquisition's first-year deduction is dominated by the study, and the study's report is the support if examined. The franchise flag: most hotels in the United States operate under a brand (a franchise agreement with a hotel company) — with the initial franchise fee (a section 197 intangible amortized over fifteen years — the franchise owner deductions guide), the monthly royalties (a percentage of room revenue — deductible when paid), the marketing fund and the reservation system fees (percentages of revenue or per-reservation fees), the loyalty program costs (the hotel pays the brand for points its guests earn — an expense), the brand's required technology and property management system, and the brand's quality inspections; the brand is the hotel's distribution, and its fees are 10 to 15 percent of room revenue in total. The PIP — the property improvement plan: a franchise agreement (and every change of ownership or brand) comes with a property improvement plan — the brand's list of required renovations to meet current standards (new case goods, new carpet, bathroom upgrades, lobby redesign, the exterior) — a six- or seven-figure capital project that is mostly five- and seven-year property (furniture, fixtures, equipment) and fifteen-year and thirty-nine-year property (site work, building improvements — with qualified improvement property rules for interior improvements to nonresidential buildings after the building is placed in service — the leasehold improvements guide's QIP rules apply equally to an owned hotel's interior renovations, except enlargements, elevators and escalators, and the internal structural framework), bonus-eligible for most of it, with the repairs-versus-improvements analysis for the replacement items (the tangible property regulations — a like-for-like replacement of worn carpet may be a repair; a renovation that betters the property is an improvement) and the partial disposition election (writing off the undepreciated basis of replaced building components when they're removed — made by reporting the loss on the timely filed original return, including extensions, for the year of removal). Revenue — rooms and the rest: room revenue (booked directly, through the brand's system, and through the online travel agencies — the OTA's commission is a cost on its own line, never netted, and the OTA's "merchant model" bookings, where the OTA collects from the guest and pays the hotel net, still book at the gross room rate with the commission as a cost), food and beverage (a hotel restaurant or bar — the restaurant deductions guide's rules), meeting and event space (the event venue deductions guide's deposit timing), parking, the resort and amenity fees, the vending and the market, and the cancellation and no-show fees; income under the cash method when received (most smaller hotels, with average annual gross receipts of US$32 million or less for 2026) or the accrual method when earned (larger and franchise-reporting hotels often use accrual). The occupancy taxes — collected for several governments: hotel stays are subject to state sales or lodging tax, county and city transient occupancy or tourist development taxes, and sometimes a special district's tax — the hotel collects each, files each (on different schedules), and remits — a liability, not income; the OTAs' merchant bookings raise the question of who collects the tax on the OTA's markup (the states have legislated this differently — many now require the OTA, as a marketplace or accommodations intermediary, to collect on the full amount the guest pays); the resort fees are usually subject to the occupancy tax; long-term stays (thirty days or more in most jurisdictions) are exempt after the threshold. The staff and the tips: housekeepers, front-desk agents, maintenance, and food and beverage staff on payroll (the hospitality classification is not in doubt — the hotel's schedule and property); the housekeeping gratuities left in rooms are tips reported to the employer (the tips guide); the restaurant's tips follow the restaurant rules, and the FICA tip credit applies to the food and beverage tips — not to housekeeping tips (section 45B covers tips received for providing, delivering, or serving food or beverages — the hotel's restaurant, bar, and room service staff qualify; housekeeping, bell, and valet tips don't); the management company, if the owner hires one, is paid a base fee (a percentage of revenue) and an incentive fee (a percentage of profit) — deductible when paid. The operating costs: utilities (a large line), laundry (in-house or outsourced), the guest supplies and amenities, the breakfast (a complimentary breakfast is a cost of the room), the maintenance and repairs, the property taxes (a large line — appealed when assessments rise), the insurance (property, liability, liquor liability for a bar, flood and wind in coastal markets — premiums have risen sharply), and the reservation and revenue management systems. Trade or business, not passive rental: a hotel is not a rental activity for the passive activity rules — the average period of customer use is seven days or less and significant services are provided (the passive activity guide) — so an owner who materially participates has non-passive income or loss (the first-year cost segregation loss offsets other income); an owner who doesn't (an investor with a management company running the hotel) has a passive activity, with the losses suspended against passive income. Entity and the QBI deduction: a hotel is not a specified service trade — the QBI deduction applies at every income, supported above the threshold by the payroll and — importantly for a hotel — by 2.5 percent of the unadjusted basis of the building and equipment (US$12 million of depreciable hotel basis — land excluded — supports a US$300,000 limitation on basis alone — the UBIA guide) (the hotel entity guide). The bookkeeping: room revenue by channel at gross with commissions separate; the other revenue lines; occupancy taxes by jurisdiction collected and remitted, with the OTA collections reconciled; the franchise fees by type; the PIP's capital schedule with the repair-versus-improvement analysis and partial dispositions; the cost segregation study's schedule; payroll with tips; the management company's fees; property taxes and appeals; insurance. The errors: the whole purchase price depreciated over thirty-nine years without a study (the first-year deduction missed); the OTA bookings booked net; occupancy taxes on resort fees missed; the PIP's replaced items left on the schedule (no partial disposition); the franchise fee deducted; and the passive investor's loss claimed against wages.

Key takeaways

• A hotel is nonresidential property (thirty-nine years), not residential rental — and the textbook cost segregation case: furniture, fixtures, equipment, and site work (often 25–40 percent of the building basis) reclassified and expensed with bonus depreciation.
• The franchise flag costs 10–15 percent of room revenue — royalties, marketing, reservations, and loyalty fees deducted when paid; the initial fee is a fifteen-year intangible.
• The PIP renovation is mostly short-lived property — with the repair-versus-improvement analysis and the partial disposition election for replaced items.
• Room revenue is booked at gross by channel; OTA commissions are a separate cost; occupancy taxes for the state, county, city, and district are liabilities collected and remitted — resort fees included.
• A hotel is not a passive rental (seven-day average, significant services) — a materially participating owner's first-year loss is non-passive; a passive investor's is suspended.
• Not a specified service trade — and the building's unadjusted basis supports the QBI limitation on its own.

The hotel's deduction file

Purchase: land and building allocation; cost segregation study. Franchise: initial fee (197), royalties, marketing, reservations, loyalty. PIP: capital schedule; repair vs improvement; partial dispositions. Revenue by channel at gross; OTA commissions; F&B, events, parking, resort fees. Occupancy taxes by jurisdiction; OTA collections reconciled. Payroll; tips by department; FICA tip credit for F&B. Management company fees. Utilities, laundry, supplies, breakfast, maintenance. Property taxes and appeals. Insurance (property, wind, flood, liability, liquor). Material participation documentation. The study and the occupancy tax filings are the two items with the largest dollars on either side.

Worked example

An owner-operator buys a 110-room select-service hotel for US$11.5 million (US$2.1 million allocated to land by appraisal), rebrands it under a new flag with a US$60,000 franchise fee (fifteen-year amortization) and a US$1.9 million PIP (new case goods, carpet, bathrooms, lobby, exterior paint). The cost segregation study reclassifies US$3.1 million of the US$9.4 million building basis into five-, seven-, and fifteen-year property; with the PIP's US$1.6 million of furniture, fixtures, and site work, the first year's bonus depreciation and write-offs total about US$4.7 million — a US$3.8 million first-year loss after the year's operating profit — non-passive, because the owner operates the hotel himself (more than 500 hours, documented), offsetting his other business income within the excess business loss limitation (the excess carried forward as a net operating loss). The PIP's removed carpet and case goods — separate five- and seven-year assets in the new owner's study, removed the year they were placed in service and so not bonus-eligible — are written off as retirements, and the replaced bathroom components under the partial disposition election. Year one's revenue: US$3.9 million of rooms at gross (US$410,000 of OTA commissions as a cost), US$120,000 of parking and market; occupancy taxes for the state, the county's tourist development tax, and the city's resort tax collected and remitted monthly, with the two largest OTAs collecting on their merchant bookings (reconciled); US$520,000 of franchise royalties, marketing, reservation, and loyalty fees. Net result: a loss in year one, a profit from year two, the QBI deduction supported by the building's unadjusted basis. An investor down the road who bought a similar hotel, hired a management company, and claimed its first-year loss against his salary: passive, suspended — he had no participation to document.

Official sources

Publication 946 states: “P.L. 119-21, commonly known as the One Big Beautiful Bill Act, reinstated the 100% special depreciation allowance for certain qualified property acquired and placed in service after January 19, 2025 (including long production period property and certain aircraft), and certain specified plants bearing fruits and nuts planted or grafted after January 19, 2025.” — Internal Revenue Service, Publication 946, How To Depreciate Property, https://www.irs.gov/publications/p946

Publication 925 states: “The average period of customer use of the property is 7 days or less. You figure the average period of customer use by dividing the total number of days in all rental periods by the number of rentals during the tax year.” — Internal Revenue Service, Publication 925, Passive Activity and At-Risk Rules, https://www.irs.gov/publications/p925

Practitioner note

A hotel is a building that is also a business: nonresidential property whose furniture, fixtures, and site work a cost segregation study moves off the thirty-nine-year schedule, under a franchise flag whose fees run 10 to 15 percent of room revenue and whose property improvement plan arrives with every change of ownership. Our hotel files run the study at purchase, write off every PIP's replaced items (partial dispositions for building components), book room revenue at gross by channel with the OTA commissions on their own line, and file each government's occupancy tax on its own schedule — and document the owner's hours, because the first-year loss is non-passive only for an owner who operates the hotel.

See also: For related guidance, see franchise owner estimated taxes and the remodel the agreement requires; and browse every small business tax guide, by situation.

Next step

Fairlight Accounting is a cross-border accounting and tax practice with a U.S. Tax Desk and a Canadian Tax Desk. Our U.S. Tax Desk handles hotel and motel returns — land and building allocation, cost segregation and bonus depreciation, franchise fee and royalty treatment, PIP renovation capitalization with partial dispositions, channel revenue and OTA commissions, multi-jurisdiction occupancy tax compliance, tip reporting, and material participation documentation. See pricing or book a call.