calculating taxes

What Is Business Property Tax?

By: , Contributor

Published on: Feb 01, 2020

State and local municipalities collect several types of property taxes that business owners need to pay.

Business property taxes are taxes levied by state and local taxing authorities on the property (both real and personal) owned by businesses. It's an "ad valorem" tax, or "according to the value of" the piece of property as assessed by the taxing authority.

What types of business property taxes are there?

There are three types of business property tax:

  • Real property taxes: These are taxes on the physical land and buildings owned by businesses (i.e., real estate taxes).
  • Tangible personal property taxes: These are taxes on the non-fixed or movable physical property owned by businesses, which can include vehicles, equipment, furniture, fixtures, tools, supplies, and inventory.
  • Intangible personal property taxes: These taxes are on non-physical personal property owned by businesses such as stocks, bonds, patents, copyrights, and goodwill.

All 50 states collect some form of business property taxes as each one imposes a tax on real property. Meanwhile, 43 collect personal property taxes on businesses, while only some collect them on intangible personal property.

Which states don't collect tangible personal property taxes on businesses?

According to the Tax Foundation, seven states have exempted all tangible personal property from tax:

  • Delaware.
  • Hawaii.
  • Illinois.
  • Iowa.
  • New York.
  • Ohio.
  • Pennsylvania.

Meanwhile, the following five states have tax exemptions for most tangible personal property outside select industries:

  • Minnesota.
  • New Hampshire.
  • New Jersey.
  • North Dakota.
  • South Dakota.

The states that levy personal property taxes on businesses do so to generate additional revenue. Overall, 31.5% of state and local tax revenue in 2016 came from some form of property tax -- real or personal on either individuals or businesses -- according to the Tax Foundation. Meanwhile, states that taxed tangible personal property, both business and individual, generated about 10% of their revenue in 2017 from these sources.

How is business property tax calculated?

Taxing authorities calculate business personal property tax on the appraised or assessed value of the property, not its fair market value. Tax assessors set the value of real properties. Meanwhile, taxing authorities assess the value of tangible personal property from an appraisal source like Kelley Blue Book or the item's initial cost minus depreciation. They'll levy a millage rate, which is an amount per $1,000 of a property's assessed value. Most taxing authorities will send out a business property statement either quarterly or annually to collect this tax.

However, if a business owner feels that their local tax authority has set too high a value on their property, they can make their case before their local assessment appeals board. Winning that appeal could potentially shave a lot of money off that property tax bill.

Is business property tax deductible on federal taxes?

Businesses can generally deduct property taxes paid on tangible personal property on their federal taxes. As long as the item is an "ordinary and necessary" business expense, then taxes paid to state and local authorities would be deductible. The IRS defines "ordinary" expenses as those that are "common and accepted" for the type of business you operate. Meanwhile, it sees "necessary" ones as those that are "helpful and appropriate." The IRS also requires that the property's primary use is for business, not personal.

For example, if you have a house-flipping business and need a pick-up truck to haul supplies, that would be ordinary and necessary. Therefore, at least a portion of the personal property tax paid would be a business tax deduction on your federal taxes. However, a real estate agent who uses their boat to show homes to clients might not be able to deduct the personal property tax expense. Using a boat to show properties might be ordinary in a lake region, but not necessary if the agent can easily drive to the houses with their car. Further, the boat would need to be primarily for business use, not for personal pleasure.

Taxes are personal in some states, even when it comes to business

Business owners will pay a variety of taxes each year, including on the income they generate and on any real property they own. Meanwhile, business owners in some states will pay additional taxes on personal property owned by the business. Because of that, those starting new businesses should check out their state’s personal property tax situation so that an unexpectedly large tax bill doesn’t cause a cash flow crunch.

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