Managing personal property taxes.

• Author: Boucher, Karen J.

States that tax personal property usually require taxpayers to complete an annual personal property tax rendition or return. Some states provide a single personal property tax return on which all property located within the state is reported. In other states, a separate return is required to be filed with each local jurisdiction in which the taxpayer owns personal property.

Most personal property tax returns differ from state income, franchise and sales and use tax returns, in that taxpayers do not compute or self-assess their property tax liability on the return. Instead, the return identifies the type of business, property location and the original costs of personal property by category. Accordingly, the tax implications of the assets reported on the return are not known at the time of filing. After the return is filed, most jurisdictions will send a separate assessment notice, followed by a tax bill. Several other jurisdictions will only send a tax bill showing the assessed value.

In completing their personal property tax returns, many businesses inadvertently miss opportunities to significantly reduce their tax liability. These tax-savings opportunities include properly categorizing assets and identifying nonexistent, nontaxable, overvalued or obsolete assets.

Proper Asset Categorization

Asset categorization is critical to the proper taxation of an asset. In determining the taxable value of personal property, most jurisdictions have established depreciation or cost-multiplier schedules, which attempt to take into consideration normal wear and tear based on the standard life for the property. Many jurisdictions differentiate between different types of equipment and have established varying depreciation rates for the specified categories of assets. For example, computers generally are entitled to a more accelerated rate of depreciation than are manufacturing machinery and office furniture.

Example 1: XYZ Corporation, a high-tech consulting firm, reports all of its personal property acquisitions as furniture and fixtures, classified as 10-year assets and depreciated at a rate of 10% per year. However, computer equipment is classified as five-year property and depreciated at a rate of 20% per year. By reclassifying its computer equipment to obtain faster depreciation, the taxable value of those assets will be lower throughout their useful lives.

It is equally important to properly classify assets as either real property or personal...