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Grow Your Tax Practice by Advising Clients on Property Taxes and Using Income Tax Planning Software

Income taxes tend to be the shining stars of the business tax world. Income tax laws are what make news headlines, and they are what drive many of your clients’ cash flow strategies and operating decisions. But other business taxes shouldn’t take a back seat. Even if your income tax services are what helps you snag new clients, your knowledge about other business taxes – like property taxes – can help you retain them.

Property taxes can be costly to small and medium-sized businesses, and while you may not have as many options to manipulate your clients’ property tax bills as you do their income tax bills, your expertise in this arena can have an impact. If you can help your clients understand why they’re paying what they’re paying, you can help them create realistic financial goals as they embark on a new reporting year.

What Are Property Taxes?

Property taxes are assessed by state and local jurisdictions. They are called “ad valorem” taxes because they are based on the property’s value rather than its purchase price. All 50 states and the District of Columbia impose some form of property tax on its inhabitants. Property tax revenues are most often used to fund county, township, and other local needs like fire protection, public parks, infrastructure, public schools, and police force. Property taxes also contribute to state-run initiatives like road repair and utilities.

There are two categories of property taxes: tangible personal property and real estate.

Tangible Personal Property Taxes

Taxes are levied on the assessed value of tangible personal property that businesses own and use within the state. Assessed value almost always begins with market value. Each state determines market values of assets differently, but in general, market value is determined based on the age of the asset, its location within the jurisdiction, the condition of the property, and the property’s income earning potential. Businesses can contest the state’s presumed market values if the initial valuation appears off.

Once market value is established, the assessed value is determined by multiplying the market value by an assessment factor. This factor varies based on the type of asset or how the asset is used. For example, in South Carolina, all business tangible personal property is assessed at 10.5% of market value but personal motor vehicles are assessed at 6% of market value.

From here, businesses can take any exemptions they are entitled to. For example, Florida businesses can exempt up to $25,000 of assessed value from their tax bill. The resulting number is the tax base, which is what is used to calculate the property tax. Tangible personal property tax rates also vary based on the type of property or how the property is used.

Real Estate Taxes

Real estate taxes are calculated in a similar fashion: first by determining market values, assessed values, and exemptions, then applying the tax rate (often called “millage rate”). Some states – like New York – only assess property taxes on real estate and choose not to levy taxes on tangible personal property at all. This trend has grown in the last two decades; more states and local jurisdictions have reduced their reliance on tangible personal property tax and instead place an emphasis on real estate taxes to raise revenues for their general funds.

Deducting Property Taxes

Both real estate and personal property taxes are deductible on a business’s tax return, but they may be limited. At the Federal level, personal property taxes are fully deductible but real estate taxes are deductible only when those funds are used to improve the welfare of the general public. When real estate taxes are used to provide “local benefits” – like building new sidewalks or sewer lines – they are not deductible. The IRS believes these taxes increase property values, so rather than allowing for a deduction of these amounts, the IRS permits businesses to increase their property’s cost basis.

If your client owns a pass-through entity like a partnership or an S corporation, pay close attention to their business’s property tax bills. Tangible personal property taxes are only deductible on the business’s return if the property is “ordinary and necessary” for the business and if the client uses the property exclusively for business purposes. When your client uses business property for personal reasons, they may not be able to deduct their entire property tax bill.

Use Income Tax Planning Software to Grow a Tax Practice 

If your clients have well-established businesses and have been dutifully filing their property tax returns for years, you can walk them through their personal property tax assessments to ensure they’re being taxed appropriately. You should:

  • Take a close look at the asset listings. Most states require taxpayers to self-report the tangible personal property that they own. These asset listings then carry over from year to year. Your client will be responsible for marking when assets have been retired and when new assets have been purchased. Review your client’s listing to make sure it’s complete. You can pull fixed asset reports to help with this process. Making sure the reports are complete will help your clients avoid penalties and interest if the jurisdiction discovers they have been underreporting assets.
  • Review market values. See if the market valuations appear reasonable. If something doesn’t look right, contact the jurisdiction to see how you can contest a valuation. You may need to pay for an approved third-party appraiser to perform the valuation.
  • Compare to last year’s tax bill. Over time, real property tends to appreciate and personal property tends to depreciate. Do your clients’ property tax bills reflect these trends? Review a few years of property tax bills to make sure.
  • Research the local tax laws. Make sure you and your client understand how their property taxes are calculated. You may discover that your client’s industry can exempt certain assets from their listings, or that assets below a certain dollar value can be disregarded. You can also confirm that the millage rates and tax rates are appropriate for your client’s business location.

If your clients are looking to expand their business operations or move to new locations, you have even more planning opportunities at your disposal. By talking to your clients early in the process, when they are still researching new business locations, you can help them consider property taxes. Real estate taxes can have a significant impact on a business’s bottom line. Moving just a zip code or two in one direction can produce a significant tax savings.

Property taxes, especially real estate taxes, can be a significant line item on a business’s expense report. Even if you have little control over what ultimately gets taxed, you can help make sure your clients’ tax reports are accurate and they know what to expect going forward. This is just part of the planning process you should consider when growing your tax practice. Together with a robust income tax planning software, you can help your clients in all aspects of their business needs. If you want to know how income tax planning software can help, reach out to us and request a demo today.

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