Companies are known to have multiple sets of books when it comes to depreciation, and it’s not only legal but required to meet all of your tax and accounting compliance requirements. The first two sets of books companies are required to keep are for income tax purposes (IRS) and accounting depreciation (financial accounting). In property tax we primarily deal with accounting depreciation and what is known as appraisal depreciation.
Properly understanding depreciation and how writing off the cost of your business assets over an extended period of time works is key to making sure your organization pays the right amount of taxes every year, but calculating appraisal depreciation is not necessarily a straightforward exercise. In this article, we’ll provide an overview of commercial property book depreciation and follow up with appraisal depreciation as it applies to business personal property (your company’s assets).
Commercial Property Depreciation: What is it?
The starting point for depreciation is with your accounting books. Book accounting attempts to cover the loss in value of an asset over the passage of time. It is a useful concept because it estimates the expected time it will take to recover the investment made in new assets by taking into account the expense of the assets acquired in order to run the business.
Most tangible assets—computers, company cars, machinery, etc.—have a limited economic life (sometimes referred to as “useful life”). To determine a depreciation plan, figure out how long an item is likely to be in service. (Tweet this!) If the asset’s useful life is five years, then its cost will be divided up into five portions which will be written off a year at a time.
For business personal property, the term “depreciation” specifically refers to tangible assets. Intangible assets are handled in a similar manner for tax purposes, but the concept is called amortization.
Commercial property depreciation for real estate isn’t quite the same. Buildings themselves may lose value over time, but businesses are not required to report on real estate for tax purposes. Instead, assessors evaluate your property using a particular commercial property valuation method and send you notice of their results.
Technologically advanced property tax software can dramatically reduce the amount of time your team spends on returns—schedule a demo to see how it works.
How do you depreciate commercial property assets?
The business personal property tax cycle begins with filing a return with a taxing jurisdiction on the book cost of your assets.
Location is important with regard to depreciation, because different jurisdictions have their own valuation rules and determine how appraisal depreciation is applied. To be in compliance with tax rules, you need to make sure you’re following the rules laid out for your locality.
With regard to asset value, there are three types of depreciation to consider:
- Physical (age) depreciation—This refers to asset wear and tear over time. Typically this is applied using state depreciation tables. Physical depreciation is often confused with book depreciation. However, book depreciation will not always be representative of the economic life of the asset being appraised.
- Functional depreciation—This is when an asset is rendered less valuable, or less useful, because it is becoming obsolete. If you bought a computer five years ago and today you can buy one that’s twice as fast for the same amount, functionally, your old computer is 50% less functional than the computer you can buy today.
- External depreciation—Sometimes assets lose their value for reasons outside of your control, such as a change in market conditions or regulatory issues. If legislation is passed that makes using desktop computers illegal and shifts users in favor of smartphones and tablets, for example, the external conditions make the market demand for desktops go down, which will affect their value.
All three of these depreciation types should be considered when valuing your assets for tax purposes. In many ways, functional and external depreciation are subjective; to make sure you’re getting the maximum benefit from depreciation, sometimes you need the help of an expert who has specific knowledge related to the assets you’re depreciating.
Simplify Commercial Property Depreciation With Software
Depreciation—and property taxes—can be complicated and time-consuming. With the right kind of software, you can simplify the depreciation process and ensure nothing falls through the cracks.
Our advanced property tax compliance software, TotalPropertyTax (TPT), can help you better manage your assets and reduce the time your team spends on compliance tasks:
- Depreciation tables for many jurisdictions are already incorporated into TPT. That means you spend less time gathering information and can complete your tax returns faster.
- You can track real estate data and demographics on what your building is being appraised at each year. You can input all your real estate values and, when the bills arrive, you can cross-check the amounts. Tracking real estate data also allows you to see trends year over year, and to do comparisons on your real estate values—even though you’re not reporting it.
- An automatic bill-paying feature allows you to pay your bills more efficiently, accurately, and on time, every time.
Interested in seeing how TPT can help your organization with property tax compliance? Schedule a free demo today.