Top Five Mistakes to Avoid in Property Tax

Tangible Personal Property Tax Overview

Companies who have tangible business personal property or inventory located in the U.S. are required to file annual returns of such assets to local taxing authorities. The reported data includes asset cost and year of acquisition, as well as inventory value for states that tax inventory.

Many people don’t realize that property tax must be paid on business assets every year that the assets are in use – even if they’ve been written off for income tax purposes. Taxing authorities (counties, cities, and states) place a value on the assets based on their specific category and the jurisdiction’s depreciation schedules. The entire return is assessed with a taxable value, to which a jurisdiction-specific tax rate is applied.  This determines the annual business personal property tax due.

Five Common Mistakes

When a property tax return is filed, the typical starting point is the company’s fixed asset listing as of the assessment date. The assessment date is the date that the tax assessor uses as a “snapshot date” of value. Assets that are physically located onsite as of that date must be listed on the return.

There are many pitfalls that can be experienced if a return filer is not proficient in local taxation requirements, as well as knowledgeable of business practices and asset locations.

Following are five areas where filing mistakes are commonly made:

1. Ghost assets
2. Classification
3. Non-taxable or exempt
4. Cost basis
5. Real or personal

Ghost Assets

We’re not talking Blair Witch Project or paranormal activity! A ghost asset refers to an asset that appears on a company’s asset listing (fixed asset register), but actually isn’t physically present at the location. Spooky, right?

These ghost assets are costing you excess property taxes.  Perform a physical inventory and purge any such assets from your asset register. The assets from the fixed asset register are typically used to populate your property tax return.

It’s important to point out that all assets on a property return will never depreciate to a $0 value - but instead depreciate to a “floor value” which will be taxed as long as the asset is in use. So even though your asset may have a $0 book value, it will always have value in the eyes of a property tax assessor.

A physical inventory or an in-person review of such items on the asset listing compared to what is really at the site could result in property tax savings to your company. A good starting place is reviewing both high-dollar assets and old assets. If you know you’re not still using equipment from the 1980’s, but you see them on your asset register, then a physical asset review is definitely needed.  It’s sure to produce positive results and reduce your property tax spend.

Classification

When assets are listed on the property tax return, they should be placed in a certain category or classification per the tax assessor’s instructions. For example, your asset description states “Dell laptop”; this item should be classified in the Computer category on the return. Some filers rely solely on the category or GL account from the fixed asset listing when deciding which assessor category to use. This can lead to mistakes in the asset value when an improper assessor depreciation schedule is applied to this asset.

Asset categories on property tax returns are tied to useful lives and depreciation schedules, all of which are determined by the taxing jurisdiction (county, city, state). Consider machinery and equipment, furniture and fixtures, computer equipment, supplies, and inventory as basic categories of assets commonly found on a property tax return. A machine used in heavy manufacturing is going to have a much longer useful life than a laptop or office equipment. The longer the useful life, the more years of gradual depreciation the assessor’s depreciation table will have.

Ensuring that assets are properly classified on the return will result in equitable valuation according to that category’s depreciation table. Reviewing asset descriptions, cost centers, general ledger account descriptions, and similar data can provide additional input on the use of the assets - which in turn will lead to accurately listing them on the return. Examples of special categories to evaluate may include research and design (R&D) equipment, manufacturing machinery, high-tech equipment, servers vs. personal computers, etc.

Non-Taxable or Exempt

If a taxpayer were to list all equipment straight from the fixed asset register onto the property return, they would run the risk of overstating the value (and subsequent taxes) of the location. Due diligence must be exercised regarding the jurisdiction’s potential property exemptions. The tax return itself offers a significant amount of information regarding what to list and where to list it. Further research sources and online tools add another layer of protection when confirming what is reportable and what is not taxable.

Be sure to understand the difference between non-taxable and exempt property. Non-taxable typically implies that the item is statutorily not taxable by nature; whereas exempt indicates that the item is typically taxable by nature but an exemption from the tax exists for certain qualifications.

Several types of exemptions exist for business personal property. One example is freeport inventory. A limited number of states tax inventory. In a few of those states (e.g. Georgia, Oklahoma, Texas, Mississippi, Arkansas, West Virginia), a freeport exemption is offered that could exempt all or partial amounts of qualifying inventory.

If inventory comes into your location and subsequently moves out of state within a designated timeframe (e.g. Texas and Oklahoma), that inventory may receive an exemption from property tax. In Mississippi, a special license is required for a Free Port warehouse. Some states require that a specific exemption form, separate from the property return, is filed; it may even have a different due date.  In states where a company has a distribution center, it’s vitally important to keep up to date on available exemptions to minimize tax liability.

Another example of an exemption occurs in Florida, where a timely-filed return translates into a $25,000 assessed value reduction.

Cost Basis

First cost, original cost, historical cost, acquired cost, fair market value, book value: these are all examples of the nomenclature seen on property tax returns. While most property returns rely on cost, there are a few jurisdictions that utilize book value. A common misconception is that book value is the go-to value as it is for federal tax. As stated above, assets are valued by most property tax assessors based on the asset’s cost multiplied by the depreciation factor for that age and category of asset.

For a high-dollar asset, a review of the capitalized costs may be worthwhile for the purpose of excluding certain components of its cost that may not be taxable (for that particular jurisdiction). Some examples of possible excludable elements are engineering costs, software, travel and living expenses, and intangibles.

For jurisdictions that require inventory reporting, be cautious to use the correct level of value. Depending on the jurisdiction, you may have to report based on FIFO, LIFO, cost, lower of cost or market, retail value, carrying value; 12-month average, year-end value or assessment date value. As inventory may be assessed fully, listing the proper value basis will help ensure an equitable assessment.

Real or Personal

A key mistake is to not review a fixed asset listing for real versus personal property. Real property is defined as land, buildings, and improvements to such. Personal property is defined as tangible, generally movable although sometimes affixed to real property. The tax assessor typically values real property regularly through valuation principles of cost, sales, and income approaches to value.  

If a company files a property tax return by blindly listing all the assets found on its fixed asset register, it runs the risk of mistakenly reporting real property items as well. In that case, the company would be double assessed for those items: once by the real property assessor and again by the personal property assessor. A double payment of tax would be inevitable.

Performing an asset classification review is imperative. Separating real property from personal property is a proven method of reducing the potential for overassessment. The definitions for real and personal property may vary by state or jurisdiction. Knowing how each jurisdiction defines such assets is critical to accurate reporting. In North Carolina for example, items that are affixed to real property may be considered as either real or personal property - depending on how permanently they are affixed. The property return for California includes a listing for both real and personal property, with a further breakdown for structure and fixture items based on the asset’s intended use or purpose.

Tips for the Taxpayer

The property tax return is complicated and time-consuming given the varying nature of requirements from jurisdiction to jurisdiction. Complexities exist in not only the taxing authorities but also business processes. The burden of proof is always on the taxpayer.

Avoiding these five common mistakes (and many others) that could occur will provide for more accurate and compliant personal property tax reporting. Through proper tax return filings, a business starts off on the right path to property tax assessment. When assessment notices are received, a detailed review of the assessor’s value coupled with the taxpayer’s expected value should be performed. Any significant discrepancies must be addressed timely with the assessor to ensure that correct values are registered in their database. A limited window of time is open for taxpayers to protest or appeal values; be sure not to delay and miss out.

How Can We Help?

Allyn’s tax team is staffed with seasoned tax professionals experienced in all aspects of Federal, multi-state and local tax compliance and consulting for large US and global corporations. We use that experience to your advantage.

Allyn files state and local property tax returns in every US taxing jurisdiction. Allyn obtains property tax data, analyzes it for proper classification, cost basis, and exemptions, and ensures timely and accurate property tax return filing and property tax bill payment processing.

We routinely conduct opportunity reviews in all US states for companies and advise clients with proactive measures to improve their tax compliance. Allyn can review your asset listing and returns, property tax bills, provide onsite property tax reviews, prepare and file returns and manage the payment of property taxes throughout the US. We can manage your tax compliance, create a solid tax process, and provide audit defense for your company.

Contact us and we can provide a customized cost-effective solution to meet your company’s needs. For further information on Allyn Tax services, please contact: tax@allynintl.com.

For More Information

If you are interested in learning more about this topic or other tax topics, please visit our Tax Publications under News and Events at www.allynintl.com.

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