Every year on April 16 many of breathe a sign of relief that our tax returns are finally filed and (gulp) we’ve stroked a check to Uncle Sam for what has hopefully been a profitable year. Procrastinators file extensions but still have to pay up. Many innkeepers, especially those with smaller properties, are often pleased that they don’t, in fact, have to write a check to the government, because, on paper, they didn’t make any (or not enough) money. It’s the magic of cost recovery, which is what we call depreciation these days.
Depreciation is a wonderful thing for real estate investors and people who own business equipment. It saves money in the short term. And, if a bed & breakfast has been successful and had a profitable year, the depreciation helps soften the blow at tax time. But there’s a danger in obsessing too much about paying (or avoiding) taxes.
Many innkeepers run their business as if avoiding taxes was their reason for existing. You run your food through the business, your car payments, your vacations, your club memberships, and maybe you don’t bother to allocate the portion of utilities and property taxes that are not exclusively for business use. And your bottom line looks terrible. Yay! No taxes this year! But guess what? There’s a price to be paid when it’s time to sell.
Buyers of bed & breakfast businesses, if they are looking for a business and not a hobby and tax shelter (which B&Bs are great for) are scrutinizing financials very closely. Banks are looking even more closely. It isn’t going to sell the inn to tell someone that you really do make money if only your personal expenses weren’t all run through the business and showing as deductions on your tax return. If you’re selling an inn business, and there’s value in the business, you must show as healthy a bottom line, net operating income, as possible. This is what creates value, and it’s what a buyer can take to a bank.
So, if you plan to sell your bed & breakfast inn in the next 3-5 years, now is the time to clean up your books, take only your allowable deductions, and show as much profit as you actually can. Depreciation will still soften the hit, but look at it this way: If you have to pay taxes, it’s only because you actually made money. Yay! (That’s a real cheer this time!).