2025 Tax Deductions every small Hotel owner should know

2025 Tax Deductions every small Hotel Owner should know - High level summary

Small hotel and B&B owners risk losing thousands each year if they overlook available tax deductions. The 2025 tax year brings expanded credits and important compliance changes, from energy-efficient upgrades to staff training, bonus depreciation, and Beneficial Ownership Information (BOI) reporting.

This guide sets out the main deductions that every small hotel owner should know about, with references to the relevant IRS guidance and U.S. tax law.

1. Energy Efficiency Deductions (Section 179D)

Hotels are among the most energy-intensive commercial buildings, which makes them prime candidates for the Energy Efficient Commercial Buildings Deduction under IRC Section 179D.

This allows hotel owners who improve their property’s energy efficiency by at least 25% to claim a tax deduction for qualifying systems such as HVAC, lighting, and building envelope upgrades. The Inflation Reduction Act expanded 179D, and owners who meet prevailing wage and apprenticeship requirements may receive even higher deduction limits. For 2025, base deductions begin at $0.58 per square foot for a 25 % energy-savings improvement and rise by $0.02 per additional percentage point up to $1.16 per sq ft at 50 % savings. Projects meeting prevailing wage and apprenticeship requirements may qualify for enhanced rates up to several times higher.

Smaller hotel owners should examine whether upgrades like central HVAC replacements, lighting retrofits to LEDs, better insulation, building envelope improvements, or advanced control systems qualify. Because hotels often have high baseline energy usage, the incremental savings are substantial.

To qualify, hotels must document baseline energy performance, engage a licensed professional engineer to certify improvements, and retain written records of the efficiency model used.

2. EPAct Opportunities for Hotels

Hotels may also qualify for incentives introduced under the Energy Policy Act (EPAct), which historically provided deductions of up to $1.80 per square foot (the historic maximum of $1.80 per sq ft applied before indexing under the Inflation Reduction Act; current indexed amounts start at $0.58 and scale upward) for buildings that achieve defined energy savings. The EPAct 2005 legislation originally created the Section 179D deduction, so these ‘EPAct opportunities’ refer to claiming 179D benefits under the current rules rather than a separate credit.

Typical eligible improvements include LED lighting, variable refrigerant flow systems, advanced controls, or envelope upgrades that cut total building energy consumption by 25% or more. For example, LED lighting, HVAC modernization (especially central systems), and variable refrigerant flow (VRF/VRV) systems are often used to qualify. EPAct is not limited to specific technologies so as long as the building as a whole meets the energy saving threshold.

Because of high energy intensity in HVAC and lighting, hotels are one of the most successful categories for claiming this deduction.

3. Section 179 Expensing and Bonus Depreciation

Small hotels often spend heavily on furnishings, fixtures, and equipment. Under Section 179, qualifying purchases can be deducted immediately instead of being depreciated over several years, up to the annual threshold set by the IRS.

For 2025, the Section 179 expensing limit is $2,500,000, phasing out after $4,000,000 of qualifying purchases (IRS Rev. Proc. 2025-32). Under the One Big Beautiful Bill Act (2025), 100 percent bonus depreciation is restored for qualified property placed in service after January 19 2025. A transitional election allows 40 percent (or 60 percent for certain long-production assets) for fiscal years ending after that date. Therefore, many hotel-specific assets, so beds, furniture, soft goods, appliances, kitchen equipment, washers/dryers, carpeting are also eligible, subject to use, depreciation schedules, and the “luxury auto” limits may apply.

You must claim these deductions on Form 4562 (Depreciation and Amortization). Accurate classification is essential: tangible property such as beds or carpet qualifies, but building structures must be depreciated under MACRS over 39 years. Be sure to assign correct useful life schedules, and don’t over-claim in year one just to invite IRS scrutiny.

4. Employee Wages, Benefits, Training, and Tips

All ordinary and necessary labour costs are deductible, including wages, payroll taxes, benefits, uniforms, and training expenses.

A new provision introduced by the 2025 tax reform under Public Law 119-21 (OBBBA), allows an above the line deduction of up to $25,000 per tipped employee in hospitality roles, subject to strict documentation and tip reporting compliance. Hotels must maintain accurate payroll and tip allocation records to support this deduction.

Therefore, be careful: tip reporting, allocation, and compliance must be strict. The IRS will scrutinize tip records and whether employer-allocated tips are properly accounted.

5. Marketing and Advertising Costs

Marketing expenses remain fully deductible if directly related to the hotel’s operations. Examples include:

• Website design, SEO, and hosting, including digital ads (Google Ads, Meta, OTA listings)

• Online travel agency listings and commission fees

• Advertising campaigns, photography, and video production

• Printing, signage, and promotional materials

Keep clear invoices showing the business purpose of each campaign or vendor payment. As long as they're “ordinary and necessary” and directly tied to the hotel operations, these costs are classic business deductions.

6. Repairs Versus Capital Improvements

Understanding the difference between a deductible repair and a capital improvement prevents costly errors. One frequent trap is misclassifying a repair (immediately deductible) vs a capital improvement (must be capitalized and depreciated).

Routine maintenance, such as repainting, minor plumbing repairs, or patching roofs, is deductible in the year incurred. Major projects that extend the property’s useful life, such as building extensions, full roof replacement, or major lobby refurbishments, must be capitalised and depreciated. The “safe harbor for routine maintenance” (IRS regs) may allow small hotel owners to deduct certain maintenance expenses under specific conditions rather than capitalise.

The IRS provides a “safe harbour for routine maintenance” allowing certain smaller recurring maintenance costs to be expensed, but documentation is key. Always document your decision-making, contractor invoices, and classification rationale.

7. Insurance, Professional Fees, and Licences

Deductible items include:

• Business property, liability, and interruption insurance

• Local lodging tax permits and health inspection fees

• Accounting, legal, audit, and consultancy costs

• Franchise or management fees, depending on contract terms

Most of these are straightforward operating deductions as long as they are paid or accrued within the tax year.

8. Interest Expense and Mortgage Interest

Interest on business loans or mortgages used to acquire, construct, or improve the hotel is deductible, subject to the business interest limitation rules introduced under the Tax Cuts and Jobs Act. Therefore Interest on debt that is directly allocable to the hotel business is generally deductible. If your hotel is financed (loan or mortgage) or you have business credit lines, the interest is a deduction, subject to the business interest limitation rules (especially post-TCJA and under OBBB). (IRC §163(j)).

Where properties are mixed-use (for example, a hotel with an owner’s residence), interest must be allocated proportionally to the business portion. Be careful in mixed-use properties: allocate interest only to the hotel portion.

9. State and Local Tax (SALT) Deduction

The One Big Beautiful Bill Act temporarily raises the State and Local Tax (SALT) deduction cap from $10,000 to $40,000 for the 2025 tax year.
This benefits hotel owners who pay high property and state taxes, but the expanded cap phases down for individuals with adjusted gross income over $500,000. To benefit, owners must itemise deductions and maintain proper evidence of state tax payments. For hotel owners paying high state property taxes, this expanded cap is a significant opportunity, but only if you properly track and itemize SALT expenses.

10. Travel, Meals, and Local Transportation

Travel undertaken for legitimate business reasons, such as trade shows, supplier meetings, or site visits, is deductible when properly substantiated.
The IRS defines these as “ordinary and necessary expenses” for travel away from your tax home.

Deductions include:

• Airfare, lodging, taxis, and ride-share fares

• Business meals (subject to the 50 percent rule)

• Mileage, parking, and tolls for local business use

Mixed personal and business trips must be separated and proportioned accurately.

11. Building Depreciation

Hotels that own their property must depreciate it under MACRS over 39 years for structural components, while furniture, fixtures, and certain improvements may qualify for shorter recovery periods or bonus depreciation. Improvements are depreciated over their useful life (e.g. 15-year, 20-year depending on type). Bonus depreciation or Section 179 may apply to certain non-structural improvements (e.g. interior renovations) so check eligibility.

Engage an accountant familiar with cost segregation studies to identify components eligible for accelerated depreciation, such as HVAC systems, electrical work, or non-structural interior elements.

12. BOI (Beneficial Ownership Information) Compliance

Under the Corporate Transparency Act, most small hotel LLCs and corporations used to have to file Beneficial Ownership Information (BOI) reports with FinCEN.
These filings are not required as of 2025, domestic U.S. hotel entities are exempt from BOI reporting under revised FinCEN rule but confirm with FinCEN for foreign-owned properties.

You may also refer to our blog - BOI Reporting for Travel Advisors in 2025: Compliance Guide

Conclusion

With careful planning, small hotel and B&B owners can capture substantial tax savings in 2025. The key is to document everything, such as energy performance reports, receipts, payroll, and financing records, and to classify expenditures correctly between repairs, improvements, and capital assets.

• Prioritize energy and HVAC upgrades - the combination of 179D + EPAct gives some of the highest return on investment for hotels.

• Max out Section 179 + bonus depreciation for furnishings and equipment, but don’t rush audit risk.

• Document everything - invoices, engineering reports, utilities baseline, contracts, especially for green claims.

• Stay on top of tip reporting and BOI compliance, especially in light of 2025 changes.

• Use a tax professional but bring this list with you - it ensures you don’t overlook deductions.

With the right strategy in 2025, a small hotel or B&B can legally reduce taxable income drastically but, given the complexity of the rules, professional advice is strongly recommended, but understanding these principles will help you work strategically with your accountant and avoid missed opportunities.

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⚠️ DISCLAIMER: The information in this article reflects the complex landscape of U.S. Federal Tax Law as of October 2025, including recently proposed and enacted legislative changes affecting the 2025 tax year. This fact-check is a high-level overview based on publicly available IRS and FinCEN guidance as of October 2025. Tax laws are subject to frequent change. This is not legal, financial, or tax advice. Always consult with your qualified CPA or tax professional knowledgeable in hospitality real estate before making any tax-related decisions. See also our Disclaimer page

References

1. Internal Revenue Service (IRS). “Energy Efficient Commercial Buildings Deduction (Section 179D).” U.S. Department of the Treasury, Internal Revenue Service, last updated 2024. Available at: https://www.irs.gov/credits-deductions/energy-efficient-commercial-buildings-deduction

2. Energy Tax Savers, Inc. “Hotel Opportunities for EPAct 179D Energy Tax Deductions.” Published 2024. Available at: https://www.energytaxsavers.com/articles/Hotel-Opportunitites

3. Internal Revenue Service (IRS). “Publication 946 – How to Depreciate Property.” U.S. Department of the Treasury, Internal Revenue Service, 2024. Available at: https://www.irs.gov/forms-pubs/about-publication-946

4. Internal Revenue Service (IRS). “Publication 463 – Travel, Gift, and Car Expenses.” U.S. Department of the Treasury, Internal Revenue Service, 2024. Available at: https://www.irs.gov/forms-pubs/about-publication-463

5. CBH LLP (Cherry Bekaert). “2025 Tax Reform for Restaurants and Hotels: Key Provisions.” Published 2025. Available at: https://www.cbh.com/insights/articles/2025-tax-reform-for-restaurants-and-hotels

6. Jeffer Mangels Butler & Mitchell LLP (Hotel Law Blog). “One Big Beautiful Bill Act – Key Tax Provisions Affecting Hospitality Owners.” Published 2025. Available at: https://hotellaw.jmbm.com/one-big-beautiful-bill-act-key-tax-provisions.html

7. Internal Revenue Service (IRS). “Understanding Business Travel Deductions.” Newsroom Release, IRS.gov, updated 2024. Available at: https://www.irs.gov/newsroom/understanding-business-travel-deductions

8. Financial Crimes Enforcement Network (FinCEN). “Beneficial Ownership Information Reporting Requirements under the Corporate Transparency Act.” U.S. Department of the Treasury, effective 2024. Available at: https://www.fincen.gov/boi

Disclaimer

This article is for general informational purposes only and does not constitute legal, tax, or accounting advice. Always consult a qualified professional regarding your specific circumstances.