Prototyping: an effective tax and fixed-asset management strategy for multilocation businesses.

• Author: Tyler, Scott M.

With the personal property tax assessment date nearing in many jurisdictions, companies that operate multiple locations are pondering possible solutions to reduce their tax liability, while also ensuring the necessary compliance. Prototyping offers these companies an effective and audit-tested alternative for satisfying such frequently daunting goals.

Many industries composed of players that operate multiple locations have suffered serious downturns in the past few years. The corporations in these industries could benefit greatly from value-added opportunities in areas that are traditionally regarded as cost centers. Prototyping is one such opportunity, a solution that can generate significant tax savings as well as improve operational efficiency for both the tax and fixed-asset departments.

The Personal Property Tax Dilemma

Multilocation businesses like retail, grocery, restaurant, lodging, and financial institutions are often at a disadvantage when it comes to reducing their personal property tax obligations. This is primarily due to the logistical challenge of maintaining accurate asset records when operating numerous locations with a high volume of assets. Furthermore, these companies generally bear a sizable personal property tax liability in aggregate, but the incremental property tax burden at each location is relatively small. These circumstances create a tax consulting conundrum because traditional minimization strategies like the "asset scrub" do not provide a worthy return on investment.

Personal property tax liability is based on the value of a taxpayer's fixed assets, making the integrity of the asset population paramount. This is especially true because assessing jurisdictions generally use their own method of depreciating assets to arrive at a taxable value. From their perspective, there is no such thing as a net book value of zero. If an asset is "on the books," regardless of its age, it will be taxed as personal property when rendered on the return. Thus, any asset that is not really in service, no matter how old, can have costly tax consequences if it is not addressed.

When multilocation companies have inaccurate records of which assets are in place at each location, the problem can usually be attributed to one of the following reasons.

* The asset disposal process at the store level is either nonexistent or inconsistently applied, so ghost assets are not properly removed from the company's books and records when retired.

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