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Tax Planning for Theme & Amusement Parks
There are more than 400 amusement parks and countless resorts in the U.S., according to the International Association of Amusement Parks and Attractions. Their unique operating nature often requires professional advisors to take a step back and evaluate the various planning opportunities available.
Amusement parks fall under their own asset class (80.0, Theme and Amusement Parks). Almost all capital assets used in theme and amusement parks are eligible for the seven-year Modified Accelerated Cost Recovery System (MACRS) treatment. As such, they’re eligible for Section 179 and bonus depreciation. Assets falling under class 80.0 include those used in the provision of rides, attractions and amusements in activities defined as theme and amusement parks. These assets include appurtenances associated with a ride, attraction, amusement or theme setting within the park and can include such items as ticket booths, shop interiors and special-purpose structures. Also, all land improvements that support park activities—such as parking lots and landscaping—also are eligible for the seven-year MACRS treatment.
There are exceptions for administration buildings, warehouses, hotels, motels and transportation equipment that fall under other asset classification codes. One of the most accurate ways to take advantage of the available depreciation deduction is to have a cost segregation study prepared. A cost segregation study is the process of reviewing real property assets and identifying items that can be reclassified as personal property or land improvements, which have shorter depreciation periods, thus allowing for much larger deductions in early tax years. These studies are especially beneficial when a project consists of components that contain items in multiple asset classes.
For instance, with a hotel project, most component costs of personal property aren’t readily determinable by reviewing project invoices or contracts. A cost segregation study breaks down and allocates items that may normally be treated as real property subject to a 39-year depreciable life into five-, seven- or 15-year personal property that’s eligible for bonus depreciation. Cost segregation studies can be performed on new and pre-existing properties. While a cost segregation study can be costly, many BKD clients have received cash flow savings at 10 to 20 times their investment in the study.
Another benefit of cost segregation studies for amusement and theme parks, resorts and other businesses relates to property tax assessments. Many municipalities base property assessments on costs associated with building permits. A cost segregation study can help determine the costs that are allocable to personal property rather than real property and therefore not subject to real property taxes. In addition, some states have special property classifications when the property is used for amusement or recreation purposes. The property could be assessed at a fraction of its valuation. For example, Georgia classifies amusement parks as a type of commercial property that’s assessed at 40 percent of its fair market value. Other states may waive the taxing of amusement park rides as real property. This varies greatly from state to state, so it’s important to research your state’s special property classifications.
More and more theme parks and resorts are moving toward cashless systems to help prevent theft. These come in the form of prepaid gift cards or reloadable cards that are used throughout the facility for items such as admission, attractions, food and beverage, souvenirs or games. As businesses begin using gift cards, proper tax treatment must be considered. The Tax Cuts and Jobs Act added Section 451(c) to the Internal Revenue Code, effectively to codify a deferral method of accounting for advanced payments for goods and services that was previously allowed under Revenue Procedure 2004-34. The new law requires an accrual-basis taxpayer to include advanced payments in gross income in the tax year of receipt, but they may elect to defer the recognition of all or a portion of an advance payment to the tax year following the year of receipt except for the portion of the advanced payment that must be included in gross income pursuant to §451(b)—the “all-events test” for accrual basis taxpayers. The U.S. Department of the Treasury expects to issue further guidance on the treatment of advance payments and changes to §451. Until further guidance is issued for the treatment of advanced payments, taxpayers my still rely on Revenue Procedure 2004-34 for the treatment of advanced payments. Taxpayers issuing gift cards should review §451(c) and watch for further guidance that may have an impact on their accounting for gift cards. Gift cards must be accounted for in such a way that a taxpayer can determine any deferral adjustments for income tax purposes.
Businesses also should be aware of the potential pitfall associated with prepaid gift cards. These items may potentially become escheatable under a state’s escheat or abandoned property rules. This means that abandoned or unclaimed gift cards must be turned over to the state. The requirements for gift cards to fall under these rules vary from state to state. Therefore, businesses should consult with their trusted BKD advisor before they begin using prepaid gift cards or if there’s a concern of a potential escheat issue.
It’s important to properly evaluate which entity type and business structures to use, especially with the many changes under the recently enacted Tax Cuts and Jobs Act. Businesses should review current employee parking arrangements to possibly eliminate or reduce any taxable portion of qualified transportation fringes under §274(a)(4). Further, those with multiple related entities that often share in revenue or expenses (such as a theme park in one entity and a hotel in another entity for which discounted “package deals” exist) should consider the arm’s-length regulations under §482.
There are many unique opportunities for theme and amusement parks and resorts. Careful consideration should be taken during the planning stage, along with a review of current operating structures and other areas of concern or opportunity.
For more information, contact Chris, Chelsea or your trusted BKD advisor.