Strategies for reducing property taxes.At most companies, paying personal property taxes is a fact of life; tax increases as companies add property and decreases as it depreciates. If equipment and other property on the books are overvalued Overvalued A stock whose current price is not justified by the earnings outlook or price/earnings (P/E) ratio and thus, expected to drop in price. Overvaluation may result from an emotional buying spurt, which inflates the market price of the stock or from a deterioration in a , a company can pay too much tax. However, companies can employ a number of strategies that accurately reflect the value of their property to reduce property taxes. Unbundling A regulatory requirement that enables a competing service provider to purchase parts of the incumbent local exchange carrier's network in order to provide service to its customers. See ILEC. Equipment Purchases A hot new trend in property tax reduction is the "unbundling" of new equipment purchases. When a company buys equipment, it should ask the vendor for an itemized invoice An itemized statement or written account of goods sent to a purchaser or consignee by a vendor that indicates the quantity and price of each piece of merchandise shipped. A consular invoice is one used in foreign trade. , breaking down the purchase into tangible and intangible costs. In some jurisdictions, there is no property tax on intangible costs. Example 1: A company buys new processing machinery for $1 million. The vendor provides an invoice specifying hardware, $800,000; engineering and development, $100,000; allocation The apportionment or designation of an item for a specific purpose or to a particular place. In the law of trusts, the allocation of cash dividends earned by a stock that makes up the principal of a trust for a beneficiary usually means that the dividends will be treated as to overhead, $100,000. The company pays tax only on $800,000 worth of property, not $1 million; $200,000 is intangible property intangible property n. items such as stock in a company which represent value but are not actual, tangible objects. not subject to property tax. Most vendors are willing to provide an itemized invoice. The extra work is not onerous on·er·ous adj. 1. Troublesome or oppressive; burdensome. See Synonyms at burdensome. 2. Law Entailing obligations that exceed advantages. , and they aim to keep customers satisfied. While companies should also be able to unbundle To sell components in a system separately. Contrast with bundle. the cost components of high-tech high-tech also hi-tech adj. Informal Of, relating to, or resembling high technology. high-tech Adjective same as hi-tech Adj. 1. items, many jurisdictions have specific provisions that apply to computer hardware and software. Sometimes, cost does not equal value; if a company has paid for special delivery service or custom features that have no value to a third party, these additional amounts should be deducted de·duct v. de·duct·ed, de·duct·ing, de·ducts v.tr. 1. To take away (a quantity) from another; subtract. 2. To derive by deduction; deduce. v.intr. before entering the property in a ledger The principal book of accounts of a business enterprise in which all the daily transactions are entered under appropriate headings to reflect the debits and credits of each account. . There is also an advantage to unbundling equipment already owned. For example, a machine bought in 1997 for $600,000 may really have been worth $500,000 for property tax purposes, with the other $100,000 allocable al·lo·ca·ble adj. Capable of being allocated. Adj. 1. allocable - capable of being distributed allocatable, apportionable distributive - serving to distribute or allot or disperse to intangibles. Again, a cooperative vendor may help by providing documentation. Some jurisdictions specifically exclude intangibles from property tax. If that is the case, companies should apply for a refund TO REFUND. To pay back by the party who has received it, to the party who has paid it, money which ought not to have been paid. 2. On a deficiency of assets, executors and administrators cum testamento annexo, are entitled to have refunded to them legacies . In the absence of a specific exclusion, it probably does not make sense to apply for a refund, as local tax authorities are reluctant to part with cash. However, the value of equipment already on the property tax roll can be lowered, which results in lower taxes in future years. Tried-and-True Strategies Besides unbundling, there are other strategies to reduce property tax: * Keep track of fixed assets fixed assets npl → activo sg fijo fixed assets npl → immobilisations fpl fixed assets fix npl → . Companies should inventory property every few years. This is especially important if there are assets in more than one location. * Make sure inventory includes a hands-on hands-on adj. Involving active participation; applied, as opposed to theoretical: "We're involved in hands-on operations, pulling levers, pushing buttons" Arthur R. Taylor. audit. On-site on-site adj. Done or located at the site, as of a particular activity: on-site monitoring of a production run; an on-site film shoot. inspections and interviews with operations personnel can quickly identify assets that are not in use. That is the best way to avoid paying tax on "ghost" property. * Do not double-count repaired equipment. In many cases, the repaired item is added to the rolls while the original remains on the list too. * Sell or donate assets the company is no longer using. Keeping little-used or abandoned assets on the books results in a company paying excess taxes every year. * Cross-check real property and personal property rolls. Some assets may have been listed twice, resulting in a double property tax. Companies should make sure items are in one category or the other. * Do not assume that fully depreciated Fully depreciated An asset that has already been charged with the maximum amount of depreciation allowed by the IRS for accounting purposes. fully depreciated Of or relating to a fixed asset that has been depreciated to a book value of zero. assets are exempt from property tax. As long as these assets are on a company's books, they are likely to be taxed. Most jurisdictions place a floor of 20% or 35% of original value. Example 2: A company bought equipment 10 years ago for $500,000. Although the equipment has been fully depreciated, the state has a 20% floor, so the equipment is valued at $100,000 for property tax purposes. Some of the equipment is just being kept in storage, so the company disposes of it and removes it from the fixed asset ledger. Several assets are still in use, however, so the company sells them to a subsidiary for fair market value (perhaps 5% or 10% of the original price). The company then leases the assets back from the subsidiary, which reduces the company's property tax. The Right Fit Properly classifying assets for depreciation purposes can reduce property tax if those assets can be placed into categories indicating a shorter life span. For example, building components may be able to qualify for five-year or seven-year depreciation, rather than the 39-year depreciation required for commercial real estate. Faster write-downs will reduce asset value in any given year, and also reduce property tax. Because real property may appreciate over the years, a company should aim for the lowest possible real property valuation for property tax valuations. Starting with a modest value means that future increases will be smaller. Computer equipment can be depreciated Depreciated may refer to:
tr.v. clas·si·fied, clas·si·fy·ing, clas·si·fies 1. To arrange or organize according to class or category. 2. To designate (a document, for example) as confidential, secret, or top secret. all high-tech equipment. Some high-tech equipment may lose value even faster than standard cost recovery schedules would indicate. If that is the case, a company may be able to justify a lower property tax assessment, with proper documentation to support its claims. Assets subject to unusual wear and tear may also qualify for faster-than-normal depreciation. Depending on the jurisdiction, many states provide property exemptions for software and equipment used in research and development, manufacturing or pollution control. Companies should take advantage of these exemptions. Bonus Benefits Increasing the attention paid to a company's assets may have benefits beyond tax savings. For example, a company's property/casualty insurance likely is based in part on. the value of its fixed assets. If the company trims its property roll, it can ask its insurer An individual or company who, through a contractual agreement, undertakes to compensate specified losses, liability, or damages incurred by another individual. An insurer is frequently an insurance company and is also known as an underwriter. to reduce premiums. When a company maintains accurate records of its fixed assets, it will enjoy better management of those assets. Once the company knows its true investment and return on investment, it can make better decisions on acquisitions of new assets and the use of existing ones. Abbreviations Commonly Used in The Tax Adviser
TTA The Tax Adviser
aff'g affirming
AFTR2d American Federal Tax Reports, second series (RIA)
Ann. IRS Announcement
CB Cumulative Bulletin
Cir. Court of Appeals
Cl. Ct. Claims Court
COBRA Consolidated Omnibus Budget
Reconciliation Act of 1985
Ct. Fed. Cls. Court of Federal Claims
DC District Court
ERISA Employee Retirement Income
Security Act of 1974
Fed. Cir. Court of Appeals for the Federal Circuit
Fed. Reg. Federal Register
F2d Federal Reports, second series
F3d Federal Reports, third series
F Supp Federal Supplement
GCM General Counsel Memorandum
HIPAA Health Insurance Portability and
Accountability Act of 1996
H. Rep. House Ways and Means Committee Report
IR Internal Revenue News Release
IRB Internal Revenue Bulletin
IRSRRA '98 Internal Revenue Service Restructuring and Reform
Act of 1998
Regs. Sec. Treasury Regulation
Rev. Proc. Revenue Procedure
Rev. Rul. Revenue Ruling
rev'g reversing
RRA Revenue Reconciliation Act of 1993
SBJPA Small Business Job Protection Act of 1996
Sec. Section (refers to the Internal Revenue Code of
1986, unless otherwise indicated)
S. Rep. Senate Finance Committee Report
Sup. Ct. Supreme Court
TAM Technical Advice Memorandum
TBOR2 Taxpayer Bill of Rights 2
TC Tax Court (regular decision)
TC Memo Tax Court (memorandum decision)
TD Treasury Decision
TRA '86 Tax Reform Act of 1986
TRA '97 Taxpayer Relief Act of 1997
USTC United States Tax Cases (Commerce Clearing House)
FROM JOE HUDDLESTON, J.D., NASHVILLE, TN |
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