Managing Personal Property Taxes
What business cost do many IB owners pay automatically year after year without ever attempting to manage or understand? The answer is the personal property tax. And yet with some basic planning or professional help, personal property taxes provide a great opportunity for cutting costs.
These taxes require businesses to pay a special levy on various types of business assets regardless of whether they operate in the red or the black. With over 80,000 local jurisdictions in over 40 states, the rules can get confusing. As if that wasn’t enough, with technological advances, small businesses are often paying the tax on equipment that’s obsolete, no longer in use, or worth much less than the taxman says.
For many businesses, this has become the largest single source of tax overpayments, says Robert Peters, national director of property tax services with the accounting firm KPMG Peat Marwick in New York. Most vulnerable are manufacturers, health care and communication businesses. If your depreciation schedules don’t accurately reflect obsolete technology, you’re probably being overtaxed on equipment, says Peters.
Checking Up in South Florida
When South Florida IB owner Terry Covert contacted tax consultant M.J. Stone of Areea Assessment Consultants to look at the assessment on his Players Club restaurant, he wasn’t even thinking about personal property taxes.
“M.J. was doing an ad valorem appeal and as an extra looked at personal property,” he said. “My accountants were doing my personal property, using depreciation tables. I wasn’t even thinking about personal property.”
What she found not only got him thinking about it, but reduced his personal property tax bill from $1900 one year to $700 the next.
“They were taxing real property as personal property, things like an air conditioner and a walk-in cooler.” he said. “Since then, I’ve been telling people to check out their assessment. It’s worth it, it’s definitely worth it.”
A tactic that Covert recommends is to “take a half hour and list your equipment, give everything a value, and then compare it against your bill. If it doesn’t agree, contact the assessor.”
Covert isn’t the only business owner fighting this battle. And the stakes can be high. Peters, of KPMG Peat Marwick, says that U.S. companies pay about 30 percent of their total state and local taxes for real and personal property.
This property is assessed in a mass appraisal method that typically lumps all assets together and averages their values. If that wasn’t bad enough, information that’s used for mass appraisals is often unverified or just plain wrong.
When Lila Robertson and her husband recently purchased their business, C&L Plumbing in Nacogoches, Texas, she called the tax office for a breakdown of their assessment. “Our assets were valued on one lump sum. I called for a breakdown on our inventory.”
The breakdown listed two backhoes assessed at $30,000 each. Robertson knew that was wrong.”They drove by and saw two backhoes and added them to our assessment. One didn’t belong to us. We had it in our lot to look at because we were considering buying it. The other one we sold for $5000, a lot less that the $30,000 assessment. And,” she adds, “what if they saw a Lincoln Continental parked there, would they have added that too?”
The addition of the backhoes more than tripled the Robertson’s assessment from the previous year. After being informed of the mistake, their local assessor corrected it. But still Robertson considers herself lucky. “We found out only because the business was changing hands, otherwise we probably wouldn’t have paid so much attention.”
The National Taxpayers Union estimates that about 60% of all taxable residential and business property is overtaxed. Peter Sepp of the NTU says that assessors make more mistakes taxing businesses than homeowners because “assessors live in houses, but how many assessors are familiar with factory equipment or cement trucks?”
Basically, the shorter its life, the faster an asset loses value. If you can show that business equipment of any kind has a shorter life than that shown on official tables, you may be able to reduce the tax.
But the biggest property tax faux pas is paying on equipment no longer in use. “Some property that is still on the tax records doesn’t exist any more,” says Dick Cunningham, director of state and local taxes for accounting firm Grant Thornton. “Its been junked or cannibalized, yet it’s still on the list so it’s taxed.”
“And,” adds attorney Robert Flavin of Assessment Counseling Services in Los Angeles, “it’s up to you to prove you’re not using it. You’ll need documentation, a bill of sale, a receipt, something to show you got rid of it.”
But where there’s danger, there’s also opportunity. “Values indicated on older computers may be grossly overstated,” says Paul Shanbron, director of property tax services for accounting firm BDO Seidman. “Most depreciation tables for computers were devised prior to the advent of the personal computer, so the table overstates the value of these assets.”
Typically, an assessor asks you to report the value of your equipment at its original cost and the year you bought it. The assessor computes the value using standard depreciation tables. But the problem with computers and other hi-tech equipment is that the bottom of the tables isn’t low enough to indicate real market value.
Says IB owner John Hastings of the American Computer Exchange in Atlanta, “We’ve been in this business since 1988 and the price drop for used computers is dramatic. We can’t get over it, it’s mind boggling, and it seems there’s no end to it.”
What’s more, the line between low-tech machinery and high-tech computers and electronics has blurred. Low-tech machinery is considered to have a longer depreciable life than computers and related items. But most of today’s “low-tech” equipment contains computer chips or other electronic elements. Tax consultant Stone tells of an expensive piece of medical equipment that was obsolete at its delivery date because of new technology that produced a new machine that cost less and did a better job.
In recent court cases in Michigan and Virginia, courts have decided that depreciation tables didn’t accurately the market value for used computer equipment. You may be able to reduce valuation-and thus your taxes-by attributing a larger part of the cost to fast-depreciating electronics, and less to the longer-lived mechanical parts.
Whatever the source of the overpayment, the way to cut your bill is to demonstrate a lower current value, Peters tells of one company that supplies the “black boxes” for in-hotel movies. As technology changes, the boxes are being replaced by direct wired access, so the value of the boxes has plunged. After assessors were told of this development, valuations were reduced about 30 percent.
Shanbrom, of BDO Seidman, suggest that busy IB owners consider hiring a consultant to help reduce property taxes. Some work on a contingency basis – they collect a portion of the tax they save. BDO Seidman, for example, charges 50 percent of the first year savings, then 25 percent of the savings in the next two years.
Hiring a reputable consultant who works on a contingency can be a win-win situation for both you and the consultant. M.J. Stone claims a 95% success rate because she doesn’t take a case unless there’s money to be made. So if a consultant looks your business over and then declines, you can assume you’re not paying too much.
As to finding a reputable consultant, Robert Flavin recommends asking your local assessor. “Ask the assessor to recommend a straight shooter. This business is so specialized, an assessor will know who’s really knowledgeable.”
Here are the steps you can take:
- Make sure you file on time, so you’re not liable for interest and penalties.
- Make certain that whoever prepares your return is familiar with your local valuation system.
- Conduct regular asset reviews to see which assets really exist, where they’re located and whether they’re still being used.
- Remember, your opinion of value is important. For example, depreciation tables can indicate one value for office furniture, but if you are a garage owner, grease and oil can age your furniture faster.
- Watch for personal property that may be confused with real estate, such as office fixtures and built-in electronics. Personal property is assigned a shorter life span than real estate, so its reported value will be lower. If you report assets as personal property, don’t count them as real estate, too, and pay double tax.
- If you lease equipment, examine your lease agreement to be certain who pays the personal property tax: the lessee or the lessor. Also, be aware if you lease equipment out, that different rates can apply in different jurisdictions.
- Remove property you have stopped using from your asset rolls. Don’t ignore property just because it has been fully depreciated for income tax purposes.
- Be aware that the value of equipment used in business areas that are declining (e.g., timber, tobacco, fishing) can be significantly less than depreciation tables show.
- Be aware of special exemptions. Pollution abatement equipment, for example, may qualify for a lower tax.
- If equipment is used more than one shift a day, a different depreciation table should apply that takes into account the additional wear and tear.
- On taxable property you built yourself, be sure to separate costs that don’t add to value, such as those attributable to construction disruptions or permit problems.
- If you purchase used assets, take care that they are not assessed using the same depreciation schedule as similar new equipment.
- When you present your list of assets to the assessor, make certain that they are classified correctly. If you depend on a busy assessor’s office to do this for you, a clerk may enter your equipment into the wrong class. And you could be assessed too much.
If you think you have a case for lower taxes, make it. Says South Florida IB owner Covert, “I tell people to go for it.”