In this article, you’ll find out what elements make up business personal property, how this property impacts the value of your real estate and how to leverage it to maximize property tax savings.
What Is Business Personal Property?When you think of your commercial real estate holdings, you’re likely to picture buildings, land and other structures. But, have you ever considered the impact of what’s inside your buildings when you review your property taxes?
Every business has furniture, fixtures, equipment, inventory or other components owned by the company that lend themselves to the production of income. This is considered business personal property, and it is taxable in many jurisdictions.
How Does Business Personal Property Affect Your Property Taxes?Often, the only consideration that companies give to business personal property is the simple form they fill out every year for each jurisdiction. If, however, you fail to meet the compliance requirements of personal property or file incorrectly, your company is at risk. The assessor will determine the value of your business personal property, add penalties and interest for improper or non-filing and possibly reject a favorable Freeport Inventory Exemption. At this point, you have lost control over your tax liability.
To mitigate this risk, you must ensure that your personal property assets are managed, documented and reported accurately. If you fall short in this area, you may incur increased commercial property taxes and threaten your bottom line.
One major factor impacting your business personal property is obsolescence. Obsolescence for business personal property includes all forms of depreciation – normal wear and tear, loss of functional utility and the impact of conditions outside of your property. These last two forms of depreciation can be leveraged to manage the assessment of your business personal property.
Real estate assessments are based on an analysis of comparable sales and rentals to estimate the market value of the land and building. Business personal property is assessed based on a published schedule of depreciation that reflects wear and tear from the date of acquisition through the date of filing. What many taxpayers don’t know is that they have a legal right to additional depreciation that could reduce their annual tax liability. When you prepare your annual business personal property compliance return, make sure that you are prepared to document and claim additional obsolescence of your personal property to your advantage.
6 Tips To Leverage The Value Of Your Business Personal Property
1. Develop a strategy. Before you even begin preparing for your annual compliance returns for your business personal property, determine who is accountable for and knowledgeable about the personal property management process and valuation. You never want to take a reactive approach to your property taxes, dealing with them only when an assessment increase comes across your desk.
Working with your team to develop a proactive commercial property tax strategy is the first step toward effective management. Once you’ve determined who is responsible for your business personal property management, research each jurisdiction’s requirements, protocols and appeal deadlines, as this is critical information for proper tax management.
2. Keep comprehensive records. It isn’t enough to simply record your business personal property holdings. You must keep comprehensive, up-to-date records that reflect the value of your holdings today.
In addition to a general asset listing, you might need information on factors such as the industry as a whole, production declines or equipment that is not state-of-the-art, in order to document your claim of additional loss in value. Remember, anything that is presented in addition to the form must be documented and supported with company and industry data in order to make your case.
3. Purge “ghost assets.” Are there items in your list of business personal property assets that were disposed of or transferred to another location? Are there items that are physically not in your building but still on your asset list? In the daily course of business operations, tracking assets in such detail is tedious, and many assets are lost in the shuffle. This is a sunken cost of doing business.
But, a broken piece of equipment or an unrepairable piece of machinery could still be taxed as if it were fully operational, if it remains on your list. To ensure that your ghost assets are removed, set up a process to review your business personal property assets and inventory on a regular basis, whether it’s monthly, quarterly or annually.
4. Follow industry standards. Every industry has its own personal property requirements for which equipment, machinery and inventory are replenished and replaced on a regular basis. An IT service provider’s business, for instance, would not be competitive if it operated with obsolete equipment. It would lose market share to competitors.
If expensive equipment (like computers) is being replaced on a regular basis, it’s essential to monitor this personal property. Look to fellow industry leaders for examples of their business personal property management.
5. Factor in the economy. Business personal property doesn’t just hold an insulated value. The economy is an external force with one of the greatest impacts on your personal property value. Economic downturn for your industry could cause depreciation of this value.
Consider the case of a coal mining equipment distributer. The energy industry has moved from coal power to gas power, and now to solar and wind power. The decline of the coal mining industry is easily documented, and the resulting demand for mining equipment is inevitably low.
Some depreciation is out of your control. The equipment isn’t obsolete; it just may not be in demand any longer. This carries a heavy weight when evaluating the potential to claim additional obsolescence of your business personal property.
6. Consider outsourcing. Managing your business personal property is a complex, in-depth effort that requires experience and specialized knowledge. Many companies don’t have the time or expertise to effectively manage personal property on their own, so they outsource this responsibility to property tax experts.
This option returns time to your daily activities, and you can rest assured that your taxes are being managed in the most effective way possible. Experienced professionals have greater insight into what constitutes taxable personal property versus non-taxable property, which is often a blurred line for many companies. Experts are also able to monitor deadlines and determine whether you’re eligible for a property assessment appeal.
If you’re not already investing adequate time, resources and effort into your personal property management, it’s time to start. With an accurate representation of your assets and a proactive plan to manage them, you’re better equipped to leverage your business personal property to your advantage.
Learn more about personal property and other unexpected tax increases by downloading our free whitepaper.