As the 2021 property tax year approaches, preparation may result in significant tax savings. For business personal property reporting and valuation, a thorough review and audit of the fixed asset register is one of the most important and impactful processes taxpayers can undertake.
Why This Is Important
The importance of this review is the result of the asset cost, not net book value, being the basis of valuing the taxable assets by the state or local tax assessor. Regardless of a low or zero net book value, tax assessors will attempt to assign their fair market value to the assets based on the assets‘ cost and year of acquisition.
Fixed Asset Register Clean-Up
To minimize the tax liability for personal property, it is important to review active assets and remove disposed assets and their corresponding cost to assure the fixed asset register best reflects the property, account and/or business as of January 1. This review includes:
- Capitalization Policy: Identify the company’s capitalization threshold, generally $2,500 or $5,000 on a cost basis. Be sure that any asset(s) which fall below the capitalization policy/threshold have been removed from the asset listing, and going forward, that those items are expensed and not capitalized.
- Unrecorded Retirements/Ghost Assets: If possible, it’s best to have unrecorded retirements/ghost assets removed from the fixed asset register prior to January 1 as it eliminates the chances of those assets being valued and removes any tax impact. Unrecorded retirements/ghost assets may consist of older assets which remain on the asset listing, unidentified partial retirements, and oversight. And, can result from capital projects that replace an older asset(s), and the asset(s) being replaced are not retired from the asset listing.
- Situs Location and Transferred Assets: Ensure that the situs location for each asset as of January 1 is accurately identified by cost center or other site coding methodology. Also, identify and remove any asset(s) that have been transferred to other company locations or outside of the U.S.
- Asset Status: Providing an asset status, where applicable, may result in the reduction in property value. This may include status information such as idle, scrap, poor, in need of repair, etc.
- Limited Asset Descriptions: Populating missing asset descriptions and improving vague General Ledger (GL) codes and descriptions allows the most appropriate and beneficial categorization of a given asset during the valuation process.
Software – Exempt
Software is typically an exempt non-taxable asset and should be categorized as such. This is especially important with corporate entities or reporting units for which the more material software assets are capitalized.
In reviewing inventory and supplies, be sure to consider:
- Valuation Information: Capture work in process and inventory finished goods cost, identifying and quantifying:
- Cancelled goods
- Damaged inventory
- Freeport and Foreign Trade Zone Exemptions: When storing and addressing inventory be mindful of freeport exemptions and foreign trade zones to obtain the most impactful tax advantage.
- Inventory Situs: Review inventory situs and, if operationally feasible, consider relocating inventory to a non-taxable state.
If you have any questions or need assistance regarding business personal property preparation and the property tax implications, contact the Duff & Phelps Property Tax Services practice.