The Price We Pay for Ownership
Congratulations! The year is half over and you’re still in business! Does this sound a bit sarcastic? It’s not meant to be. Anybody who has operated a business, regardless of what that business is, knows that the life of a small businessperson can be difficult at times. Current oil prices are adding to the cost of doing business and there is no relief in sight. Government regulations are getting worse and it seems every step forward brings new headaches. In its own way, operating a business is like a war, with battles every day. Sure, it’s not a shooting war, but there are casualties called business failures.
So, you see, the congratulations on your survival to this point are truly sincere. The trick now, is to survive to the end of the year. Unfortunately, the government is not likely to be your best friend in the battle for survival. Simply put, like everyone else, governments have needs and there is generally only one way to meet those needs - taxation. What governments tax varies from state to state and even municipality to municipality. Most states have some form of income tax and sales tax. There are toll roads, fees to use public facilities and other revenue raisers, but the taxes on the mind of many small businesspeople are property taxes.
Property taxes are just what they sound like - taxes on real and personal property you own. If you are a homeowner, you have probably already run into taxes on real estate, but you may not be familiar with other taxes businesses pay. Generally, a business also has to pay taxes on the value of its inventory and its furniture, fixtures, vehicles and equipment. In effect, businesses are required to pay taxes for the privilege of owning their property.
This system seems a bit unfair, but it’s been around for a long time and is not likely to go away anytime soon. So how do you, as a small business owner, survive in a crazy system where everything you own is taxed? After this article, you might have a few new ideas.
Real Estate Taxes
Let’s start with the easiest tax to attack - real estate taxes. Most real estate is taxed based on some percentage of its market value. While this may sound simple in theory, it is not simple in practice. The reason is that no two people look at the value of a piece of property the same. For instance, Joe may look at the corner building’s value thinking he will keep the building in place as rental property while Sally may be planning to tear the building down and build a parking garage. While the ultimate value of the property will be determined on its income generation ability, Joe is looking at the present building for both the land and the structure. All Sally really wants is the land. Who do you think will pay more for the property? The same is true of the assets you employ in your business.
What is your real estate worth in today’s market? The answer to that question depends on how much production, which translates into income, you can derive from the building. For what purpose do you use the building? Is it your main plant; perhaps it’s a warehouse; maybe it’s just sitting there in a state of disrepair now that you’ve moved to a new location. If your real estate assets are used as rental properties, one very good measure of value is based on the value of future net income. If you have a manufacturing plant, income may be a good indicator, but the value may be more easily determined by looking at other sales in the area and valuing your property based on the sales of other properties.
The bottom line is that you should never blindly accept the value your local assessor uses unless you absolutely believe the property is valued correctly. In these times of high real estate inflation, it’s easy to believe that the value of your property has risen dramatically, but don’t be fooled. Look at the assessor’s assumptions. Challenge anything that you can to get the value reduced. After all, why pay more tax for your property than you must?
The value of personal property is generally a self-reported number. Since you have control over the personal property the assessor sees, make sure your depreciation schedules reflect only what you own. Often, small businesses go from year-to-year adding items to the depreciation schedule, but they forget to remove assets from the schedule when they are abandoned or sold. Since the schedule is the basis upon which the assessor values your personal property, be certain to have an accurate report.
You may not be surprised to know that your friendly assessor doesn’t always adjust his schedule of your assets. If you see a major jump in the value of assets, question the reasoning. Ask for a detail of the assets the assessor claims you own. Be certain the list is accurate. Make sure the cost basis of the assets is correct also. Take a look at the method of depreciation your assessor uses. The lives and methods used by the assessor probably have a statutory basis, so don’t be surprised if you can’t challenge depreciation rates.
Have you ever wondered why there are so many sales near year-end? It’s true that the holiday season is a time for shopping, but December 31 also marks the end of the tax year for many businesses. The taxable value for inventories is often based on either year-end values or some average of the month-end values. Make sure the values you report to the assessor are accurate. Take a hard look at the value of ending inventory and make sure your costing records are accurate. Though it may seem onerous, take a physical inventory at year-end to clean up your inventory records. Look at slow-moving items and determine if you think the items will sell sometime. If the items are likely not to sell, write the items off. Some people have ancient inventory for that one customer who still likes the old products. Make sure the customer is still in business and will need those parts someday and, if applicable, zero out obsolete items.
Some states recognize that the inventory tax can cost them jobs. One approach to fix this problem is to offer a credit at the state level for any inventory taxes paid. Make sure that you take any available credits. Depending on the size of your inventory, the credit could be sizable.
Taxes based on property owned can be quite high. Some small businesses can be crippled by the payment of property taxes. Your best bet to reduce those taxes is to be certain your assessor has all the facts about your property. Make sure the assessor knows what property you own and the right values are used. If you need help, give us a call. We are more than willing to assist you in paying only the taxes due and not a penny more.
Happy birthday Uncle Sam!