With property valuations falling as a result of the economy, now is a perfect time to negotiate a more reasonable value for your business personal property assets.
“Taxing jurisdictions are trying their best to maintain revenue,” says Jenna Kerwood, principal and property tax practice leader at Brown Smith Wallace LLC. “Due to the downturn in the economy, states are conducting more audits and taking a more aggressive stance when valuing your property.”
Smart Business spoke with Kerwood about how property tax affects businesses and how a personal property review can help you cut costs.
What should a business owner understand about personal property tax?
Personal property tax is typically based on the fair market value of your tangible assets. The statutes refer to this legal standard of assessment in many ways, such as ‘true value’ or ‘cash value.’
The assessor typically requires property owners to report their assets’ historical cost by year of acquisition and then apply specific depreciation factors to arrive at an assessment.
Since historical cost of assets less depreciation rarely equates to fair market value, it is prudent to evaluate the propriety of your annual assessments by considering the accuracy of your fixed-asset accounting records, physical and economic life of assets, equipment utilization as compared to design capacity and the various state-offered exemptions.
What are the compliance requirements associated with property tax?
Currently, all but 10 states tax businesses’ tangible personal property. The states that tax personal property require a return or a personal property tax statement that must be submitted to each local jurisdiction, such as the county, township or village, each with their own due dates.
After filing, you’ll likely receive an assessment notice, although not all jurisdictions send notices. The notice will tell you the fair market value of your property according to the assessor.
Check the notice against your return value to make sure it’s what you were expecting. If it’s not, you can appeal the assessment. Time frames for appeals are often very short, some only 10 days. Because appeal deadlines are different for each state, and often each jurisdiction, the property owner must be aware of the timing. If you miss an appeal deadline, there is rarely any recourse.
Once you have appealed to the jurisdiction, you’ll have a hearing, which is your opportunity to prove your opinion of value. Sometimes these hearings escalate to the courts, but not often. Once you agree on a final assessed value, you’ll receive a tax bill for that year based on the revised value.
Another point to remember with property tax is that you’re responsible for paying it, even if you don’t receive the bill or it’s sent to the wrong address. No matter what the circumstances are, you have to pay the penalty if it’s late. It’s up to you to realize that your bill is late and call the jurisdiction to request a copy.
Is filing a property tax return straightforward?
Depending on the number of states that your business penetrates, number of locations, plants, stores, etc., and the dollar value and volume of fixed assets, compliance can quickly become a burden. Inventory is taxable in some states and must be reported as of the assessment date, which also varies. If you ship a portion of your inventory out of state, there may be freeport exemptions available that require annual applications.
Distinguishing between real and personal property can also be challenging depending on how projects are capitalized. If a real estate item such as an HVAC system is classified as machinery and equipment on your property tax return, then you are most likely creating a double assessment. Pollution control-related equipment may also be exempt, providing the assets are certified by the proper authority.
As with any tax, it is best to be proactive and understand each state’s laws and reporting requirements in an effort to minimize your tax liability.
How do I know if my property tax value is fair?
All property owners should at some point conduct an asset review. Make sure you understand all of the costs that are being capitalized and verify that they are considered part of the property for tax purposes.
Tour the facilities and talk with the plant managers, engineers and IT specialists. Ask questions regarding the condition, physical life, upgrades, repairs and utilization of equipment.
As you become more familiar with the assets and the various state laws, filing requirements and exemption opportunities, you will better understand the fair value of your company’s assets, which will enable you to minimize your tax liability and audit risk.
How much can I save with a personal property review, and what are some other benefits of doing one?
Savings can vary, depending on the accuracy of the fixed-asset listing and existing filing positions, but typically, an asset review can save upward of 20 to 25 percent.
Secondary benefits include cleaning up your asset listing, updating filing positions and identifying changes to your capitalization policy that will allow you to maximize your savings for future years.
Jenna Kerwood is a principal and leads the property tax practice at Brown Smith Wallace LLC. Reach her at (314) 983-1360 or firstname.lastname@example.org.