Property tax: a CPA's perspective.

• Author: Ruez, D. Bryan

The pressure on businesses to reduce costs continues at an increasing pace. CPAs have long focused on Federal taxes to reduce costs, but as state and local taxes increase both in amount and in complexity, they provide opportunities to reduce costs as well. Within the state and local tax mix, the property tax is often overlooked because many CPAs are unfamiliar with property tax laws and valuation methods. However, a resourceful practitioner can find tax savings in this oldest and least popular Of taxes.

In most states, property tax is based on the property's fair market value (FMV); both real property and personal property may be subject to taxation FMV is defined as the price at which the property would sell in the open market in an exchange between a willing seller and willing buyer, both with adequate information with which to make a decision and neither being under duress. This standard is nearly universal; however, individual taxing jurisdictions may have exceptions to this standard (such as the Proposition 13 limitation in California).

The privilege tax is a tax equal to the property tax. It is imposed on property owned by an exempt entity (such as the Federal government) and leased to a taxpayer for commercial purposes. This tax generally applies to such businesses as concessionaires at national parks and companies operating at public facilities, such as airports.

Personal property is subject to taxation in 42 states and the District of Columbia. Personal property taxes are sometimes centrally administered by the state revenue agency, or they may be locally administered under uniform state statutes, regulations and guidelines. In a handful of states, local governments are authorized to impose and administer personal property taxes.

Different classes of property may be assessed by different assessing officers. It is customary for a local assessing officer to value residential and local commercial property. Centrally assessed property is usually assessed by the state taxing agency (because the business operates across county or state lines). The value of the property allocated to a particular state is usually apportioned back to the local governmental entities.

Centrally Assessed Property

Because centrally assessed property works as a unit across county lines, it is usually assessed on a unitary basis, with the entire business valued as an operating unit rather than as a collection of individual assets. Unitary assessment is more akin to business valuation than traditional real property appraisal. As a rule, utility property is classified as centrally assessed property and valued as a unit.

Sometimes, centrally assessed properties are not subject to unitary valuation methodologies. For example, in some states natural resource property is centrally assessed. However, rather than valuing, for example, an oil company as a whole, each individual well is valued using a discounted cash flow method.

The same basic approaches to value are used in valuing centrally assessed properties that are used in real estate valuation, but with several adaptations. Typically, the cost approach is computed by using historical cost less depreciation. This method is most relevant when valuing regulated utility companies subject to earnings restrictions and for newly built special purpose assets. Replacement cost (new) less depreciation is rarely used, because it is so difficult to determine.

Two income methods are often used to value these...