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Business Tax Write Off
06-22-2011, 11:04 PM
Post: #1
Business Tax Write Off
I am in the process of starting up a business, and I need to know about tax write offs for my clients.

The business model encourages hotels to give away free rooms based on referrals from past guests.

My question, is when a hotel gives a free room away as a reward for a referral - essentially for advertising for the hotel, can the hotel then write off the advertising expence if the guest is a canadian citizen?

I have confirmed already that advertising domestically is a tax write off, and that it would 50% of the advertising costs, but is this considered a tax write off?

I ask this because one responce I got back said no, but they explanation did not make sence. I will copy it.....

"If they give a stay or attraction pass away it would be recorded by increasing revenue by the value of the gift and increasing advertising and promotion expense by the equivalent amount. Basically in and out on the Income statement. The benefit to the hotel or attraction would be in the positive referrals out there on the internet"

So they are telling me here, that giving away a hotel room counts as room revenue, even though there is no actual revenue generated.

Is this right, or am I right, that a free room, is a free room, and there is only an expence to the hotel, no revenue generated.

Thanks!
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06-23-2011, 01:16 PM
Post: #2
RE: Business Tax Write Off
You are talking about a barter transaction.

You give away free rooms, which means you get zero revenue. You get free advertising, which cost you zero expense.

If you want to put a value on the expense as a write-off, you will need to put a value on the revenue as income.

Therefore, no revenue generated, no expense incurred. The citizenship of the guest does not make any difference.
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06-23-2011, 11:01 PM
Post: #3
RE: Business Tax Write Off
(06-23-2011 01:16 PM)Aida Howard Wrote:  You are talking about a barter transaction.

You give away free rooms, which means you get zero revenue. You get free advertising, which cost you zero expense.

If you want to put a value on the expense as a write-off, you will need to put a value on the revenue as income.

Therefore, no revenue generated, no expense incurred. The citizenship of the guest does not make any difference.

Hi Aida,

Thank you for the reply, my question, is why does it count as free advertising, when the hotel must incur the cost of the room - to operate a room, on average it costs a hotel $35 - this is accounted for in employee costs, maintenence costs, and utilities (water usage in the room, electricity usage in the room etc...). I can see how general hotel operations would not count as an expence though, so I am starting to understand the reasoning behind why its not a write off, but I am also trying to find a loop hole to help with my marketing strategy.

If the hotel were to input a rate on that room, instead of 0, then transfer the balance at check out to a house account labled "Advertising", keep this as a running total until month/year end and then use that as your advertising costs - showing that the hotel is indeed incurring a cost on the rooms, can that be written off?

Thanks again for the answer, you are helping quite a bit actually!
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06-24-2011, 09:55 AM
Post: #4
RE: Business Tax Write Off
The total costs of operating a hotel are already tax deductible, so you cannot single out the operating costs of a room and add it to the total operating costs. That would be double billing.

There are fixed costs in running a hotel. These costs remain the same whether you have one customer or zero customer. All costs are write-offs. You do not have to single them out.
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06-24-2011, 11:05 PM
Post: #5
RE: Business Tax Write Off
That is the first responce that makes sence to me! haha

Ok, lets say that the hotel instead of issuing a guest a free room night, were to pay me cash/check for an amount that I in turn issue the guest a gift certificate for that hotel? Is that counted as an advertising expence because they are paying me cash out of the top dollar?
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06-25-2011, 01:51 PM
Post: #6
RE: Business Tax Write Off
This is getting interesting.
Suppose the hotel pays Mr. X $100. How can Mr. X issue a hotel room gift certificate, because Mr. X is not the hotel?
The hotel can claim a $100 expense for the payment to Mr. X.
Mr. X needs to report an income of $100 and pay tax on that income.

But Mr. X does not own the hotel, and Mr. X cannot issue a room certificate.
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06-27-2011, 12:15 AM
Post: #7
RE: Business Tax Write Off
(06-25-2011 01:51 PM)Aida Howard Wrote:  This is getting interesting.
Suppose the hotel pays Mr. X $100. How can Mr. X issue a hotel room gift certificate, because Mr. X is not the hotel?
The hotel can claim a $100 expense for the payment to Mr. X.
Mr. X needs to report an income of $100 and pay tax on that income.

But Mr. X does not own the hotel, and Mr. X cannot issue a room certificate.

Ok before I over think this, and figure out a way to do it, I want to clarify something.
The only way the hotel can write off an advertising cost, is if they pay a fee for the advertising out of the top dollar, right?
When they pay that fee, it then is counted as income for who ever receives that money, and in turn they have to claim it as income on their income tax. So no matter who receives the money, it needs to be taxed.

So if the hotel gifts away a room, for any reason other than a charitable donation, it is considered a barter transaction. Barter transactions are not considered to be an expense, as there is an equal return on both sides of the transaction. What if then, the return is not equal? What if the value of the return is considered to be greater for one side or the other, in this case the return for the referrals is considered greater than the free night?

So lets say that each referral is considered valued at 1 point. A free room is valued at 10 points, but the hotel exchanges the free room for 5 points. This then becomes an expense to the hotel of 5 points in the barter system.

I copied this from Wikipedia - "Other countries do not have the reporting requirement that the U.S. does concerning proceeds from barter transactions, but taxation is handled the same way as a cash transaction. If one barters for a profit, one pays the appropriate tax; if one generates a loss in the transaction, they have a loss. Bartering for business is also taxed accordingly as business income or business expense. Many barter exchanges require that one register as a business
So now, because the barter is based on advertising, and the transaction is not equal - the hotel taking the loss, does this now show that it is an expense to the hotel as a result of the barter transaction, and that because any reasonable expense to a business is considered a tax write off, that we can then write off the portion that they are essentially taking a loss on (what ever the % of the write off that is) in this example - half the value of the room?
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06-27-2011, 01:26 PM
Post: #8
RE: Business Tax Write Off
The hotel is not taking a loss on a single transaction. The hotel is making less income as a whole.
The expenses involved in running the hotel are already allowed as expenses or write-offs.
Employee salaries, electricity, supplies, everything involved in running the hotel, whether the rooms are empty or not, are already allowed as write-offs.
You cannot take a portion out of what is already written off as expenses to serve as another write-off.

For example:
The hotel makes a total of $10,000 in room bookings.
Expenses:
Salaries $2000
Electricity $500
Supplies $200
Advertising $300
Total expenses $3,000
Net income before tax $7,000

The hotel gives away free room. No income
The hotel is not incurring any more expenses. If it is, simply add the expenses to the list of expenses, and deduct against total income. For example, if it is spending pickup passenger transportation because of the free room given, then add the transport fees to the above list of expenses. This is what is meant by allowable expenses.

I hope you are not the accountant for this hotel........
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06-27-2011, 01:55 PM
Post: #9
RE: Business Tax Write Off
There is a reason why accountants are needed in business. Accountants follow a set of gaap also known as generally accepted accounting principles, so whichever way you look at your question, the answer is the same.
You should barter free rooms only if you are getting value in the advertising exchange not because of a potential writeoffs.
There are many other legitimate writeoffs.
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06-27-2011, 11:20 PM
Post: #10
RE: Business Tax Write Off
LOL, no I'm not the accountant at the hotel I work at.

Where my quesiton(s) are stemming from is a business I am starting, and I am trying to help with my marketing campaign when I sell the idea to the hotels.

I came here to ask these questions before I have even completed my business plan, so that I am on the straight and narrow before starting my business. I worked as an AR supervisor at a hotel one time, but I didn't really have to do any real accounting per-say. just make sure people pay their bills!

Aida - so what you are saying, is that because the expenses are already covered in various tax write offs, that it can not be doubled up. However, giving away a free room essentially is being written off, but it is combined in the grand scheme of things, and divided into the the sub-categories that you used in your example.

So a free room might raise the cost of electricity, water, salaries, etc, but since the hotel is already writing those expenses off, they arn't incurring any more costs by giving away the rooms.

So when I am selling my idea to the hotels, I can say to them "When you give away a free room, it raises you're expenses, however, since those expenses are a tax deduction, you will receive back a portion of the cost to operate that room in your general tax deductions"

The reason this is such a big deal to me, is because in time the hotel will be giving away more free rooms than they have in the past. I want to show them that this is not really a bad thing, as the cost to operate a free room, is less in the grand scheme of things because of the tax advantages they are(should be) taking advantage of, and the added bonus of getting other revenue when the guest uses the restaurant, gift shop, and other various services that hotels generally offer.

This has been an invaluable discussion for me, as now I am alot more clear on how to present my idea. I just need to finish my business plan now, and start my business!

Thank you greatly for all your advice!
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