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What are some examples of the kinds of things I can do to reduce property tax liabilities?
You can also focus on property-tax-savings opportunities such as:
Ghost Assets – ghost assets may include property records that continue to be depreciated for financial or income tax purposes, but which no longer physically exist. On the other hand, assets may have reached full depreciation—indeed, they may actually have been disposed of by the cost center—but the FAMS record does not reflect disposal.
Retired or Permanently Idled Assets – changes may have occurred in the organization’s operations that cause certain equipment to become idle or to cease processing. The probability that this equipment will ever be productive again is remote.
Construction Work in Progress – whether a company is constructing a new facility or an assembly line, certain costs are usually charged to a project that do not add value to the actual assets under construction. Although many assessors like to use the Cost Approach to value CWIP, with a little bit of analysis and review of the details, it should be easy to prove that “Cost does not equal Value.”
Real versus Personal – when a company owns the real estate where the business operations are conducted, the Tax Department can compare their personal property returns with the Assessor’s Property Record Card. Classifications for concern include the categories of Fixtures; however, certain costs related to the operational processes, such as electrical wiring and plumbing, or installed bases for heavy-duty machinery and equipment, may have also been picked up by the Assessor’s Real Property Division.
Lessors and Lessees – many jurisdictions require the reporting of Leasehold Improvements for Personal Property Tax Compliance. Some lessors use a work letter to specify the level of interior finish and equipment the landlord will provide to the tenant. In other cases, the lessee assumes responsibility to complete the property’s build-out. Assessors may not be aware of who actually incurred the costs of construction. If a net lease situation exists with a property tax pass-through, it would be a good idea for the landlord and tenant to jointly review the Assessor’s Property Record Card for the handling of the improvement costs.
Financing Leases and Operating Leases – Usually, the tax department has to go out of its way to obtain information on operating leases. Financing leases may or may not be separately classified in the FAMS system.
Intangible Assets – There are a wide variety of items that are intangible in nature but reflect value for financial purposes. From a mergers-and-acquisition standpoint, examples of typical items include Patents, Client Lists, Copyrights, and Trademarks. Custom-designed or purchased software is another example of intangibles that is found in most organizations.
Service Lives of Operational Assets – With the rapid advances in technology and the use of computers to guide manufacturing, assembly, distribution, business, and personal services processes, the economic utility of the equipment can become obsolete rather quickly. Purchased or acquired business operations and real estate may contain elements of obsolescence that become evident when the acquiring entity starts to consolidate operations.
Being aware of the above areas should help eliminate over-reporting of assets. Taking the time to conduct thorough reviews before you implement new software, and throughout the year, will ensure that the tax department benefits from the new software.
Once the physical inventory or review is completed, reconciliation of the findings to other financial records is in order. In states that conduct cycle audits, most property tax auditors usually start their audits with a desire to reconcile reported costs—as of the Assessment Date—to the General Ledger balances or income tax returns. It is good practice to conduct reconciliation whether or not there is audit exposure. This step can assist the tax department in documenting tax savings.
Property Tax Tips are published to provide useful tax information. Return to this site periodically for helpful tax-cutting suggestions, tax reminders, and current tax information.
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