Leveraging Commercial Property Tax Risk in Uncertain Times

Posted by Anne Sheehan on Apr 17, 2019

commercial property tax in economic recessionsMany experts contend that the 10-year run of relatively stable economic growth is overdue for a correction. While the arc of the next recession is difficult to predict, forward-looking finance chiefs are formulating plans to navigate their companies through the next economic downturn.

A recession would mean shoring up balance sheets and shaving costs, all while continuing to fund strategic growth initiatives. Commercial property tax management is a key variable in a company’s strategic plan that often goes unexplored. 

While commercial property tax does not get a lot of coverage in business school or CPA curriculum, it is a cost that worries many senior finance executives, and with good reason. Commercial property taxes can account for as much as 40 percent of all state and local taxes that a company pays.

Often when a tax bill comes in, finance and tax leaders simply pay it without realizing that they have options to potentially reduce their bill. By implementing a long-term strategic property tax management plan, CFOs and VPs of tax can proactively reduce operating costs, accurately budget for property tax payments, and uncover opportunities for tax savings.

Commercial Property Tax Savings in Uncertain Times

Land and real estate values always fluctuate, but this is compounded during uncertain economic conditions and especially during recessions. Because of the desynchronization recessions create between market values and assessed values, there are opportunities for savings if a company takes proactive steps prior to receiving their tax bill. With 82% of CFOs believing that a recession will start by the end of 2020, now is the time to start preparing these plans.

While commercial property tax is a concern for senior finance leaders, they often lack the knowledge and internal resources to consistently track the fair market value of their real estate and personal property assets. Without this data, it can be extremely difficult to challenge over-assessments.

Michael J. Dvornak, CFO of Heritage Plastics, experienced this first hand. “After the 2008 financial crisis, we saw valuations going up, but we didn’t have the training, capacity or resources to effectively mount a defense and spend weeks preparing each appeal. The result was that we were potentially leaving money on the table.”

Organizations that don't develop property tax management plans can end up scrambling to pay a bigger-than-expected tax bill, which can impact budgets and cause a potential cash crunch. Companies often receive unanticipated tax notices without truly understanding their obligations. 

Lay the Groundwork for Commercial Property Tax Strategy

A consolidated, long term commercial property tax management plan is an essential part of the global corporate finance strategy to mitigate risk in a challenging economic environment. The best defense is getting out in front of any issues and knowing fair market value of all your commercial property, including equipment, machinery and other taxable property, before the tax assessment arrives.

Preparation is an important factor to successfully managing commercial property taxes. This includes creating best estimates of annual tax liabilities during the budgeting process based on projected property values, state laws, and jurisdictional patterns. An additional benefit to preparation is identifying market trends that negatively impact business operations and can be leveraged as an appeal opportunity for tax savings.  

In uncertain times, CFOs and VPs of Tax need to look anywhere they can to cut costs and manage risk. Commercial property tax is one area that should be incorporated into a comprehensive risk management strategy, but it is a complex issue that requires specialized expertise outside traditional corporate accounting and finance responsibilities.

For more information about managing commercial property tax in uncertain economic times, check out our new e-Book at CFO.com!

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