What is Business Property Tax?
Business property tax is a catch-all term for both real estate tax as well as business personal property tax. We will dive into each of these subsections to help you fully understand.
What is Business Real Estate Tax?
If you own real estate as part of your business, then you will pay taxes on the property. When you purchase real estate for your business, the property was registered with the appropriate taxing authorities. You will receive information on any changes in your assessed value and the amount of tax you owe annually.
Property taxes are assessed by local governments - towns, cities, counties, villages, etc. - where your business property is located. Revenue that those local governments collect from your business property taxes are used to fund schools, infrastructure, fire and police, roads, and more.
Typically, the amount of taxes you owe on your property is calculated by multiplying the tax rate by the assessed value.
For example, if the property tax rate is 4% and your property has an assessed value of $1M, then you would owe $40,000 in property taxes.
Keep in mind, however, that if you have multiple locations, you will likely notice that assessed values are not always assessed the same across those locations.
What is Business Personal Property Tax?
While business real estate tax evaluates your land or buildings, business personal property tax, a requirement in North Carolina, is a list of the assets the business owns and needs to function.
While business real estate tax is paid based on the value of your land and/or buildings, business personal property tax is a requirement in North Carolina and is calculated based on a list of your assets.
Types of Assets Included in Business Personal Property Tax:
- Machinery and equipment
- Office furniture and fixtures
- Computer equipment
- Supplies on hand
Business personal property is assessed annually based on depreciation schedules set forth by local governments. Owners of business personal property in North Carolina must list their property on the listing form by January 31st of each year unless you have obtained an extension, then each county determines their own extended due date.
Personal Property Tax: Two Common Mistakes
The most common mistakes made when listing assets are:
1. Not Removing an Asset
According to business personal property tax rules in North Carolina, the assets your business owns will never fully depreciate. If you have assets that are still listed, despite no longer being located on your property, you are paying tax on those assets year after year.
As part of our services at Sharon Lyall, CPA, we complete a physical inventory, or asset tagging. This means we physically double-check your list of assets against the assets present in your facility. This helps us remove “ghost assets”. If we determine that you have assets listed that are not actually present we may be able to help lower your tax burden., we can petition the county for a refund. In fact, we can go back several years depending on the rules in your area.
2. Not Properly Listing Current Assets
There are several ways in which an asset can be improperly listed.
- Miscategorization: What we find is that many assets are miscategorized. Different categories depreciate at different rates. For example, some manufacturing equipment can be listed under depreciation schedules that are not on the pre-printed forms provided by the counties. Unless you know about these “hidden schedules”, you could be paying more than you should.
- Leasehold Improvements: Leasehold improvements are absolutely an asset for your business. However, leasehold improvements are often taken into consideration when your real estate is assigned a value. If leasehold improvements are included in your asset listing, you would pay taxes on those improvements twice.
- Construction-in-Progress: Assets that are listed as CIP never depreciate. According to personal property tax rules in North Carolina, CIP is taxed at 100% of its value instead of depreciating like other assets that have been booked. You need to ensure that any items that are listed as CIP get moved to your asset listing as soon as they are put into use.
For example, you own a bank with several branches and the home office orders 100 new computers for employees across five branches. When the computers are sitting at the home office, unused, they are often considered CIP equipment and, according to business person property rules, do not depreciate. However, as you send computers out to your branches, and your employees begin to use them, they should then transfer over to your asset list where they will begin to depreciate.
- Idle Equipment: This is equipment that is no longer needed for your business to function but is still on-site. The floor for idle obsolete equipment might be 10% whereas the floor for equipment in use could be 25%. By taking the time to list this equipment as idle, we create long-term cost savings.
How is Business Property Tax Calculated?
Business personal property is calculated differently between states and can sometimes even vary at the county level. If you’re unsure of how to calculate your business personal property taxes, simply contact us.
Calculations can differ greatly depending on the state where you conduct business. Most counties in North Carolina use the North Carolina Department of Revenue trending schedules to value business personal property. This method requires that a business list the historical cost of the asset by year of acquisition. The county then calculates the assessed value by depreciating the historical cost. The assessed value is then multiplied by the tax rate to determine the tax due.
Additionally, the date on which your assets are to be valued vary by state. In North Carolina, the valuation date is on January 1. However, in Alabama, the valuation date is October 1st.
Even exemptions vary by state. As always, to best understand how business personal property taxes are calculated in your area, it’s best to reach out to us.
Tips for Small Business Owners
For all businesses there are some important steps you can take to help you with your business property tax.
- Keep Comprehensive Records
A list of your business personal property isn’t enough. Records should be comprehensive and reflect the historical cost of the property. You should include not only the listing of assets, but factors such as industry and production declines. You will need to also record purchase dates and prices. Also, have a detailed description of each asset.
- Determine if You Have Ghost Assets
A ghost asset listing is one that is no longer physically present at the business because it has been lost or stolen, or has been moved to another facility. Some common ghost assets are computers, phones, copy machines, furniture, cash registers, or other equipment.
Tracking assets can be a tedious task but leaving these assets on the books can cost you. A full review of your company’s assets can help identify ghost assets.
- Understand Economic Factors
Several external factors, including the economy, can impact the value of business personal property. Things such as an economic downturn can dramatically impact the value of your business assets.
Maximizing your business tax benefits can seem overwhelming. Many small businesses don’t have the time to effectively manage their business personal property while simultaneously running their day-to-day business. That’s why it's important to consider working with a professional experienced in the field. Working with a professional can provide key insights for your company.
Sharon Lyall, CPA will work with you to ensure your business property taxes are accurate. For a free asset review, or if you just have questions about the process, contact Sharon H. Lyall CPA for more information.