At most companies, paying personal property taxes is a fact of life; tax increases as companies add property and decreases as it depreciates.
If equipment and other property on the books are overvalued, a company can pay too much tax. However, companies can employ a number of strategies that accurately reflect the value of their property to reduce property taxes.
Unbundling Equipment Purchases
A hot new trend in property tax reduction is the "unbundling" of new equipment purchases. When a company buys equipment, it should ask the vendor for an itemized invoice, breaking down the purchase into tangible and intangible costs. In some jurisdictions, there is no property tax on intangible costs.
Example 1: A company buys new processing machinery for $1 million. The vendor provides an invoice specifying hardware, $800,000; engineering and development, $100,000; allocation to overhead, $100,000. The company pays tax only on $800,000 worth of property, not $1 million; $200,000 is intangible property not subject to property tax.
Most vendors are willing to provide an itemized invoice. The extra work is not onerous, and they aim to keep customers satisfied.
While companies should also be able to unbundle the cost components of high-tech items, many jurisdictions have specific provisions that apply to computer hardware and software. Sometimes, cost does not equal value; if a company has paid for special delivery service or custom features that have no value to a third party, these additional amounts should be deducted before entering the property in a ledger.
There is also an advantage to unbundling equipment already owned. For example, a machine bought in 1997 for $600,000 may really have been worth $500,000 for property tax purposes, with the other $100,000 allocable to intangibles. Again, a cooperative vendor may help by providing documentation.
Some jurisdictions specifically exclude intangibles from property tax. If that is the case, companies should apply for a refund. In the absence of a specific exclusion, it probably does not make sense to apply for a refund, as local tax authorities are reluctant to part with cash. However, the value of equipment already on the property tax roll can be lowered, which results in lower taxes in future years.
Besides unbundling, there are other strategies to reduce property tax:
* Keep track of fixed assets. Companies should inventory property every few years. This is especially...