Did you know that for many businesses, property tax is the largest state and local tax obligation and one of the largest annual operating expenses incurred, sometimes reaching 40% of total tax spend? Given this, has your business done all it can do to minimize its real and personal property tax liabilities? Unlike income taxes, property tax assessments are based on the estimated value of the property. Businesses that take a proactive planning approach to understanding and managing their property tax obligations may have opportunities to reduce the amount of property taxes they pay.
Property tax reductions can provide valuable “above-the-line” cash savings, especially during periods of economic downturns when assessed values may be more likely to decrease. The current economic environment amplifies the need for taxpayers to avoid excessive property tax liabilities by ensuring that their property is not overvalued.
Annual compliance and real estate appeal deadlines can provide opportunities to affect property values. Challenging real property assessments issued by jurisdictions within the appeal window may reduce real property tax liabilities. Taking appropriate positions on personal property tax returns related to any detriments to value may reduce personal property tax liabilities. Planning and attention to property taxes can help a business minimize its Total Tax Liability.
Property Tax Planning Considerations
Property tax rules vary by locality, and tracking the differences can be burdensome without the assistance of property tax experts. These differences include varying rules and exemptions, which can and often do lead to different results across jurisdictions, varying reporting and compliance procedures and differing requirements for businesses to challenge or appeal assessments. Some of the considerations for taxpayers looking to ensure their property taxes are accurate are discussed below.
- Understand the property’s assessed value. A property’s fair market value is an estimate of the price at which the property would change hands in an arm’s length transaction. A property’s “assessed value” is the value placed on the property by the jurisdiction for purposes of calculating the property owner’s annual property tax. The assessed value is typically a percentage of the fair market value and takes into account factors such as the quality of the property and market conditions. Taxpayers should reconcile how a property’s assessed value is calculated to be able to effectively evaluate the accuracy of the fair market value placed on their property by the jurisdiction.
- File timely appeals. Each jurisdiction sets its own rules for appealing property tax assessments. Typically, a business cannot challenge a property’s value once it receives the tax bill. An appeal must be filed within a set window of time after receiving the assessment notice, which in some cases could be a year prior to receiving the tax bill. If an appeal is not filed during the determined period, a taxpayer generally may not appeal the assessment.
- Review obsolescence factors annually. Property tax tables take into account the ordinary diminishment of a property’s value because of factors such as physical wear, age, and technological advancements. Obsolescence is an additional form of impairment resulting from internal or external factors affecting value, such as the functionality of equipment or external forces that have impacted financial performance. Regardless of the age of the property, obsolescence factors should be reviewed annually to determine the property’s fair market value.
- Manage audits. Left alone, property tax auditors can make inaccurate or aggressive decisions, relying heavily on asset listings and balance sheets to determine if items have been appropriately reported. Taxpayers have much to gain by staying in contact with auditors throughout the audit process. Auditors should know the story that goes with the data. Are all assets on the list physically located at the location being reported? Are construction in progress (CIP) assets held on site or at a vendor? Is the supplies balance an annual or year-end balance? In the absence of taxpayer direction, auditors may make assumptions based on limited data. Once audit results are finalized, taxpayers can appeal but the burden of proof generally rests with the taxpayer.
- Classification of real and personal property. Double taxation of real and personal property can occur if a company incorrectly reports real estate as personal property. By understanding what qualifies as real estate in a jurisdiction and ensuring that real estate assets are not reported on a personal property tax return, taxpayers can avoid paying tax twice on the same asset. This applies especially to specialized assets. Further, because real estate tax and personal property tax administrators often work in separate divisions that do not share information, businesses cannot count on the taxing jurisdictions to spot errors.
- Situs of Property. Property is reportable by the owner to the jurisdiction where the property is located on the jurisdiction’s annual “lien date.” Oftentimes, taxpayers mistakenly report property to the wrong jurisdiction. Fixed asset listings do not necessarily provide the detail needed to understand the accurate situs, or legal location, of a property. Inquiries should be made to determine whether capitalized assets were delivered to the location as of the lien date and the physical location of bulk capitalized assets designated to a regional or central location.
- Treatment of inventory. A number of states subject inventory to personal property tax. Reporting standards among the states vary, including the types of inventory and values reported, reporting periods used, and available exemptions for inventory turnover. Understanding and implementing the most advantageous filing methodologies can result in savings.
Written by Dorothy Radicevich, Jeff Shamma, and Dan Fadden. Copyright © 2022 BDO USA, LLP. All rights reserved. www.bdo.com.