[ezcol_1third]
[/ezcol_1third] [ezcol_2third_end]By Mark Cooter, CPA, Cherry Bekaert[/ezcol_2third_end]
To shrink property taxes, focus on what your company capitalizes
At most companies, paying personal property taxes is simply a fact of life. Your taxes go up as you acquire property, and drop as that property depreciates. If the equipment and other property on your books are overvalued, however, you are almost certainly paying too much tax. Your company can utilize a number of strategies to reduce property taxes. Your company’s property tax challenges are unique.
Intangible Costs
When you purchase new equipment, ask your vendor to provide an itemized bill that details the tangible and intangible costs. In some jurisdictions, you may not owe property tax on the intangible costs.
For example, let’s say you buy new machinery for $2 million, and the vendor gives you a bill for “$500,000 in hardware, $500,000 in engineering and development, and $1,000,000 in overhead.” You would pay tax on only $500,000 worth of property, not $2 million, because $1,500,000 is considered intangible property and not subject to property tax. Intangible costs don’t add value.
Sure-fire Strategies
Keep track of fixed assets. Inventory your property every few years, especially if you have assets in more than one location.
Conduct a hands-on audit. On-site inspections and interviews with operations personnel can quickly identify assets that are no longer in use. Avoid paying tax on this “ghost” property.
De-dupe your records. Some assets may have been listed twice. In many cases, repaired equipment is added to your property tax rolls, while the original item remains on the list, too.
Sell or donate unused assets. If you keep little-used or abandoned assets on your books, you will continue to pay taxes on them.
Faster Depreciation
Properly classifying your assets for depreciation purposes can reduce your taxes, if those assets can be put into a category with a shorter life span. Real property may appreciate over the years, so aim for the lowest possible real property valuation. Starting with a modest value means that future increases will be smaller.
Computer equipment can be depreciated more rapidly than manufacturing equipment or office furniture. Records should specifically classify all high-tech equipment. Assets that are subject to unusual wear and tear may also qualify for faster-than-normal depreciation.
Also, some states provide property exemptions for software and equipment used in research and development, manufacturing or pollution control. Be sure you know your state’s exemptions and use them whenever possible.
Cost segregation studies and implementation of new tangible property regulations can help ensure you are maximizing deductions and getting assets classified in the correct and shortest life possible.
Bonus Benefits
By maintaining accurate records of your fixed assets, you will enjoy better management of those assets. Once you know your true investment and return, you can make better decisions regarding acquisition of new assets and the use of existing ones.
