Increase Your Tax Savings Through Property Taxes and the Use of 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 cash flow strategies and operating decisions. But other business taxes shouldn’t take a back seat.

Property taxes can be costly to small and medium-sized businesses, and while you may not have as many options to manipulate your property tax bills as you do your income tax bills, you can have an impact. If you can understand why you’re paying what you’re paying, you can create realistic financial goals as you 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 you own 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 you use business property for personal reasons, you may not be able to deduct your entire property tax bill.

Use Income Tax Planning Software to Grow a Tax Practice 

If you have well-established businesses and have been dutifully filing your property tax returns for years, you walk through your personal property tax assessments to ensure you’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 you own. These asset listings then carry over from year to year. You will be responsible for marking when assets have been retired and when new assets have been purchased. Review your 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 you avoid penalties and interest if the jurisdiction discovers you have been underreporting assets.

If you're looking to expand your business operations or move to new locations, you have even more planning opportunities at your disposal. It's ideal to determine property taxes early on in the process because they 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 tax reports are accurate and you know what to expect going forward. This is just part of the planning process you should consider. Together with a robust income tax planning software, can help in all aspects of your business needs. If you want to know how income tax planning software can help, reach out to us!