With budget season at hand, we are all working diligently to deliver accurate forecasts for our companies. While projecting revenue is an important part of the process, most CFOs will also take a deep dive into projected expenses for the upcoming year. Nothing has the potential to throw a company off track faster than an unexpected bill that exceeds budget forecasts. For businesses that own commercial real estate, machinery, and equipment, the annual property tax bill can often be this budget buster due to unanticipated increases.
Companies typically classify their property taxes as fixed costs and forecast a tax amount based on a percentage adjustment to last year’s bill. But there’s a problem with that methodology. Property tax bills are based on an asset’s fair market value, and fair market value is not tracked in a company’s financial statements.
To create a meaningful property tax budget with accurate accruals and reliable cash flow estimates, property owners need to know everything about their properties including current fair market values and how their property tax assessment is calculated.
Here are key considerations when evaluating your organization’s property tax budget:
- Tax ratios are set by law and they can vary based on property type. Make sure you know which tax ratios apply to your properties.
- State law requires assessments to be based on fair market value. Since your company financials track the amortized historic cost of each asset, you do not have enough information in-house to determine an accurate fair market value. This makes it difficult to accurately project your annual liability.
- The trends in millage rates and revaluation cycles in local jurisdictions.
- An analysis of property assessments for new construction or acquisitions.
Tracking these commercial property tax components for even one jurisdiction can be complicated and time-consuming, never mind doing so for a multi-state commercial portfolio. In this case, businesses often need to rely on outside help to accurately forecast their property tax liability in the year ahead. A best practice is to create a dashboard of the entire portfolio to facilitate a strategic, long term property tax management plan.
Property Tax Budget Risks
You now know property taxes are complex, but the biggest risk of all lies in your lack of control and visibility. For example, while all local taxing jurisdictions are subject to the same state laws, they implement these laws differently based on their capacity and available resources. This becomes even more of a problem when you factor in that the taxing jurisdiction completely controls the process (and often there is little transparency into the process) and the fact that you, the taxpayer, always have the burden of proof when challenging assessments. Considering property taxes make up over 40% of state and local tax that companies pay, this becomes even more of a risk to the taxpayer.
Another risk is estimating the annual property tax liability to help underwrite the financials of a new project. Companies will often put in a fully loaded liability for year one, when the property has just been acquired and the land is vacant. Instead, companies should figure out the value of the land in year one and follow this process over time, throughout all the development stages of a project. The biggest benefit to creating detailed projections based on progress of development is you’re able to manage cash flow, something every project fights to keep on a daily basis. Don’t let your project suffer from an “ignorance penalty” when there are experts who can handle it for you.
Balancing the effects of cost-cutting for the short term with the benefits of implementing a long-term strategic cost reduction approach is always a major challenge. Taking the long view, however, can lower your risk and positively impact your financials year over year.
Managing Property Tax Risk
By now, you understand just how little control you as a taxpayer have over your property tax obligations. While it’s possible to challenge assessments, the burden is always on the taxpayer to prove that the assessor’s estimate of fair market value is incorrect. This “accurate until proven otherwise” standard puts an even higher premium on getting your budget right.
To effectively manage property tax risk, businesses need to invest in and execute long-term property tax management strategies. Carefully developed property tax budget estimates based on fair market value will help shield you against the risk of surprise increases in your tax bill.
If you would like to learn more about the value that a property tax consultant can add to your budgeting process, please contact RPTA at email@example.com.