By Carl Hoemke.
Almost every state has rules about the taxability of goods and services, and the complexity of those rules affects a lot of business owners and CFOs daily. But a tax on tangible personal property can be just as confusing. Certain times of year, when those taxes may be due, you may ask yourself: What counts as real property vs. personal property? What happens if my business grows or downsizes? How do I stay compliant?
We’ll break down the taxability of tangible personal property and answer those common questions and more:
- What is tangible personal property?
- What’s the difference between tangible personal property and real property?
- How is tangible personal property taxed?
- What are the compliance requirements for personal property?
- What happens if my business grows or downsizes?
- How are property taxes calculated, and how does depreciation work?
- How do state-specific regulations complicate compliance?
What is tangible personal property?
Tangible personal property is anything your business owns that is movable. This property can include office furniture and supplies, machinery, tools, and vehicles. Like real property, tangible personal property tax is assessed based on the presumed value of the assets. However, finding and evaluating those values can take time and effort.
What’s the difference between tangible personal property and real property?
Whereas tangible property is movable, real property is stationary physical property; it includes land and anything permanently affixed to it, like buildings. There are a few other differences you should know:
Real estate property does not necessitate filing a tax return; an assessor estimates the value of your property and sends you a notice detailing the valuation and taxable amounts. When it’s time to pay, you’ll receive a real property tax bill in the mail. Real estate tax bills can be due once or twice a year depending on the jurisdiction. Real property taxes apply in all 50 states.
Tangible personal property or movable assets are taxable in up to 43 states, depending on their classification. These taxes require a return, though the lien date and deadline are dependent on their sites (location). The valuation process for tangible personal property uses depreciation tables and other methods.
How is tangible personal property taxed?
Personal property tax assessments are typically based on fair market value. Business owners file a tax return form with a property appraiser, who then values the property. The property value multiplied by the jurisdictional tax rate determines the tax amount due.
Fair market value is not simply the initial purchase price of an item. Instead, determining its value through a proper appraisal considers several factors:
- The current cost to replace it
- The item’s depreciation
- Any loss due to functional or economic obsolescence
It’s important to understand that an item’s value doesn’t just decrease with age. Other factors can significantly impact its worth. For instance, if an item isn’t functioning as designed or market conditions have made its use less relevant, the total depreciation can be much more significant than expected from physical wear and tear alone.
What are the compliance requirements for personal property?
Property owners must file a tangible personal property tax return around April 1 each year in most states — be sure and check your state for filing due dates. If owners miss anything or neglect to account for personal property, it can be considered “omitted property,” and unpaid taxes could be subject to penalties and interest. Additionally, if your property value is not fairly represented due to the mathematical result of the return, you can benefit from bringing up your reasons during your filing.
What happens if my business grows or downsizes?
As your business expands, you’ll likely accumulate more personal property. This growth often means adding workstations for new employees and increasing storage or production equipment for more extensive inventory. Remember to update your personal property tax report on January 1 to reflect these changes in your business assets.
Downsizing? Ensure you capture the decrease in personal property on your records too. Otherwise, you may pay tangible personal property taxes on furniture and equipment you no longer own. If your downsizing is due to a shift in economic conditions, you may be eligible for an obsolescence adjustment.
How are property taxes calculated, and how does depreciation work?
The IRS issued guidelines for different property types under the Modified Accelerated Cost Recovery System (MACRS). Depreciation methods vary between types of assets:
- Office furniture’s average useful life is seven years.
- Computers depreciate over five years.
- Specific agricultural machinery depreciates over a 10-year term.
Many assessors use IRS categories as guidelines for depreciating assets. On the other hand, many don’t use the MACRS and utilize other depreciation factors such as Marshall & Swift and Iowa-based curves.
How do state-specific regulations complicate compliance?
All 50 states tax real property, but only 43 tax certain tangible personal property. If your company has personal property in multiple states, you’re responsible for submitting returns in every county where you have an obligation. You’ll also have to contend with different rules, due dates, discounts, and penalties in each jurisdiction. These rule variations can result in significant paperwork to interpret and manage.
Some states have more complex property tax rules than others:
Pennsylvania doesn’t collect tangible personal property tax, but some counties, municipalities, and schools in the commonwealth collect real property taxes.
Texas has 254 counties, each following a different property tax depreciation schedule. If your business has property in multiple counties in the Lone Star State, keeping track of your property tax bills can get complicated quickly.
And some states, including Idaho, Maine, New Mexico, and Rhode Island, don’t use a standardized return and depreciation form. If you’re filing in those states, your paperwork might be trickier.
Automation can help
If you’re doing property tax calculations by hand or relying on other manual methods, the process can get complicated quickly. Automated systems can simplify property tax management by automatically capturing and validating historical assessment factors and other vital data points from over 20,000 assessing and collecting jurisdictions. That means you can skip looking up due dates, mailing addresses, and depreciation tables — and spend your time on more valuable tasks, like growing your business.
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Carl Hoemke is General Manager – Property Tax at Avalara. As an entrepreneur in the property tax software sector and a finance industry executive with over thirty years of experience, Carl’s mission is to help companies become more efficient by leveraging tax technology into their business.
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