In most jurisdictions, private businesses are required to pay the so-called ad valorem taxes on business personal and real property. Most business people treat these taxes as a necessary evil – you have to pay them regardless of how well or poorly the company did in a year. You simply have to fill out the local assessor forms about the business property changes, additions and asset retirement, then send in the check.
Interestingly, most assessors do not appraise the business property at its true fair market value. This is a defensive tactic. If a business owner gets a tax bill that shows the business asset values as overstated, he is likely to object to the amount. It is harder to argue if the assessed values are below what the assets are actually worth.
It turns out that the assessed value of a business asset does not matter in so far as the tax bill is concerned. There are two key elements to a business property tax. First, is the assessed value. Second is the overall tax revenue the local government expects to collect. The tax rate is determined based on the overall property valuation and the revenue goal.
So it does not matter if your firm’s assets are appraised at 100% or 50% of their fair market value. The business property tax expense is exactly the same.
Since the tax revenues are split across the entire local asset base, it does matter if your business property valuation is relatively higher than that of other local companies. There are two reasons this may happen:
- You have overstated the values of your company’s assets.
- The assessor has not properly equalized the value of your firm’s assets in relation to other companies in the area.
In fact, business property tax bills usually do not detail the equalization rate applied to calculate your firm’s property tax burden. The assessor applies the effective equalization rate to all local companies in order to spread the business property taxes on an equal share basis.
The important part to remember is that the business property values and, therefore, the taxes are based on the asset values your company has reported initially. The assessor then calculates your tax bill based on the these initial asset values along with any adjustments for depreciation and inflation.
One point to bear in mind is that the assessor is unlikely to adjust your business property tax for any economic or technological asset obsolescence.
To minimize your business property tax bill, be sure to report the newly added assets at their true market values. As time goes by, make appropriate adjustments to the asset values as property is being used up and replaced.