Personal property tax is a form of taxation imposed on fixed assets owned by individuals and businesses. It applies to a wide range of fixed assets, including machinery, equipment, and furniture, and is enforced in numerous jurisdictions. By understanding the applicable rules, maintaining accurate asset records, and engaging tax professionals, businesses can navigate the tax assessment process more effectively.
This article outlines key steps to effectively prepare fixed assets for property tax assessment.
Why Is It Important?
The significance of this preparation lies in the fact that tax assessors value taxable assets based on their original cost, not the net book value. It is important to note that assessors will assign a fair market value to assets, taking into consideration their cost and the year of acquisition, regardless of whether they have a low or zero net book value.
Fixed Asset Register Preparation and Clean Up
Organizations can minimize tax liability by presenting an accurate and up-to-date fixed asset register. An in-depth review of in-service assets should be conducted to remove any disposed assets and their corresponding costs from the fixed asset register. This step is crucial to avoid unnecessary tax liabilities on assets that are no longer part of the property, account, or business.
The capitalization policy refers to a company’s threshold for determining which assets should be capitalized (recorded as assets on the balance sheet) and which should be expensed (recorded as expenses on the income statement). The threshold is typically set at a specific dollar amount, such as $2,500 or $5,000, based on the cost of the asset.
When reviewing the asset listing, it is crucial to identify any assets that fall below the capitalization threshold. These assets should be removed from the asset listing and treated as expenses instead of being capitalized. In other words, rather than recording them as long-term assets, they should be recognized as immediate expenses in the accounting records.
By applying the capitalization policy correctly, a company ensures that only significant and high-value assets are capitalized. Assets below the threshold are treated as expenses, allowing for more accurate financial reporting and preventing the unnecessary burden of tracking and depreciating low-value assets. Going forward, it is important to consistently follow the capitalization policy, ensuring that items falling below the threshold are expensed and not added to the asset listing.
Unrecorded Retirement and Ghost Asset Clean Up
Unrecorded retirements or ghost assets refer to assets that are no longer in use or have been disposed of but remain on the fixed asset register. These assets are often overlooked or forgotten, resulting in inaccurate asset records. It is important to identify and remove these unrecorded retirements or ghost assets from the fixed asset register before January 1. Allowing organizations to maintain a more accurate fixed asset register, as only active and relevant assets are included. This not only helps in proper tax assessment but also provides a clearer picture of the company’s asset holdings and allows for effective financial reporting and decision-making.
By removing unrecorded retirements or ghost assets prior to the beginning of the tax assessment period, you eliminate the chances of these assets being valued and prevent any potential tax impact. These unrecorded retirements or ghost assets typically include older assets that are still listed, partially retired assets that have not been properly identified, or assets that were not retired from the asset listing when replaced by newer assets through capital projects.
Asset Transfers and Movement
When managing fixed assets for property tax purposes, it is important to accurately determine the situs location of each asset as of January 1. The situs location refers to the specific physical location where an asset is located or used. This information is crucial for determining the applicable tax jurisdiction and assessing the correct tax liability.
To ensure accuracy, it is recommended to identify the situs location of each asset based on a cost center or other site coding methodology. This allows for clear and consistent categorization of assets according to their physical location within the organization.
Additionally, it is important to identify and remove any assets that have been transferred to other company locations or moved outside of the United States. Transferred assets should be properly updated in the fixed asset register to reflect their new location accurately. This ensures that the tax assessment is based on the correct situs location and prevents potential discrepancies or incorrect tax implications.
By accurately identifying the situs location of assets and addressing any transferred assets within the fixed asset register, individuals and businesses can ensure compliance with tax regulations and minimize the risk of misallocating tax liabilities.
Review of Economic Lives and Asset Status
The review of economic lives and asset status involves assessing both the remaining useful lives of assets and their current condition. This evaluation is important as it can potentially lead to a reduction in the assessed value of the property for tax purposes. When providing asset status information, such as identifying assets that are idle, scrap, in poor condition, or in need of repair, it can influence the valuation of the property. Assets that are not actively utilized, considered obsolete, or require significant repairs generally have lower values compared to assets that are fully functional and well-maintained.
By accurately reporting the asset status and considering the remaining economic lives of the assets, individuals and businesses can provide valuable information to tax assessors. This information allows assessors to make adjustments to the assessed value based on the assets’ current condition and expected remaining lifespan. If an asset is determined to have a shorter remaining economic life or is in poor condition, it may result in a lower tax liability for that specific asset.
Asset Descriptions Updating
Limited asset descriptions refer to situations where asset descriptions are incomplete or lacking sufficient detail in the fixed asset register. This can make it challenging to accurately categorize and assess the value of assets during the property valuation process. In such cases, it is important to populate missing asset descriptions and enhance vague General Ledger (GL) codes and descriptions. By providing comprehensive and detailed asset descriptions, individuals and businesses can ensure that each asset is appropriately categorized during the valuation process. This allows for a more accurate assessment of the asset’s value based on its specific characteristics, functionality, and purpose.
Improving vague GL codes and descriptions is equally important as it enhances the clarity and specificity of asset categorization. General Ledger codes and descriptions are often used to group similar assets together for accounting and reporting purposes. By refining these codes and descriptions, assets can be more effectively grouped and analyzed, enabling a more accurate and beneficial categorization during the valuation process. Accurate and detailed asset descriptions, along with improved GL codes and descriptions, contribute to a clearer understanding of the assets and their respective values, leading to better decision-making and compliance with tax regulations.
Property Tax Exemption for Software
Software assets are generally considered exempt or non-taxable for property tax purposes. It is important to categorize software assets accordingly to ensure compliance with tax regulations. This becomes particularly significant for corporate entities or reporting units where software assets hold substantial value and are capitalized on the balance sheet.
Categorizing software assets as exempt acknowledges their special status and helps avoid unnecessary tax liabilities. By properly identifying software assets as exempt, individuals and businesses can ensure that they are not subject to property taxes associated with taxable assets.
Inventory and Supplies Preparation for Property Tax
Inventory and supplies are important components of a business’s assets, and it is crucial to review them thoroughly for property tax purposes. When reviewing inventory and supplies, several factors should be taken into consideration.
Valuation information plays a significant role in assessing the value of inventory and supplies. It is important to capture relevant data, such as work-in-process costs, finished goods cost, and quantities. Additionally, it is essential to identify and quantify any reserves, write-downs, canceled goods, or damaged inventory that may impact the valuation. Properly accounting for these factors ensures accurate reporting and minimizes potential tax liabilities.
Another aspect to consider is the potential tax advantages related to freeport exemptions and foreign trade zones. When storing and managing inventory, it is important to be aware of any available exemptions or benefits provided by freeport regulations or foreign trade zones. Understanding and utilizing these advantages can have a significant impact on reducing the tax burden associated with inventory and supplies.
Inventory situs refers to the physical location of the inventory. Reviewing the situs of inventory is important as it can affect the tax implications. If operationally feasible, businesses should consider relocating inventory to a non-taxable state or jurisdiction. By strategically managing the situs of inventory, businesses can potentially reduce their tax liabilities and take advantage of more favorable tax environments.
A comprehensive review of inventory and supplies for property tax purposes involves considering valuation information, exploring freeport and foreign trade zone exemptions, and evaluating the inventory situs. By properly addressing these factors, businesses can optimize their tax strategies, minimize tax liabilities, and ensure compliance with applicable regulations.
Where to start if you think Property Tax Services can help
The most appropriate place to start is to review your Fixed Asset Register and reevaluate business processes of fixed asset management to diligently maximize tax strategies.
Our Fixed Asset Advisory team has deep expertise in reviewing and preparing fixed assets for property tax assessments. Each year, we provide property tax and advisory solutions to hundreds of clients in virtually every industry.
Contact us today to learn more.