Most organizations would take advantage of all available means to reduce their property tax bills—if only they knew about them (or had time to spend applying them).
But for many companies, identifying and requesting exemptions is well worth the effort, and it saves them thousands or millions of dollars each year. And while it may not be practical for an established business to relocate to a more tax-friendly area, it is possible to become more well-versed on the tax exemption policies of the jurisdictions you’re already in so you can start taking advantage of them. The first step is understanding the common types of exemptions, which are listed below. Then, dig into the policies of your own tax districts and get started.
Common Business Property Tax Exemptions
Tangible Vs. Intangible Assets
Businesses have many different types of assets, some of which are tangible; others are intangible.
Tangible assets—those that have a physical form—are divided into categories: personal property, or assets you can move around; and real property, which is affixed to the ground, part of the ground, or is the ground.
Intangible assets have no physical form but do have value—for example, patents, trademarks, customer relationships, FCC licenses, etc.
These categories of assets are taxed differently in different states. In most states, intangible assets are tax-exempt; they focus on the tangible assets. (That’s not the case across the board, though.)
Tangible Property Tax Exemptions
Within the category of tangible assets, tax policies vary:
- Tangible personal property is exempt in some states.
- For states that do tax tangible personal property, exemptions may apply in cases where an intangible component is bundled together with the tangible asset, for example, a laptop with software on it. The software is intangible while the laptop is tangible. To take advantage of an exemption on intangible property, you would need to break out the value of the individual components, listing only the tangible part as a taxable asset on your tax return.
Tax Tip: Software bundled with a tangible asset is one of the more challenging exemptions. You usually get an invoice for a laptop, but nothing that indicates the value of the software associated with it—which is what jurisdictions really want to see. If your accounting department has a vendor relationship that can help them get a specific cost breakout, that report may be enough for filing. An alternative option is to conduct a software study, where you identify what portion of particular types of assets have software, and identify the value of the software components you purchased.
- All costs associated with putting a tangible personal asset into use are assumed to enhance the value of the asset and may be taxable in some states; in others these expenditures are exempt. They include:
- The cost of installation (like installing a lathe in a workshop).
- Sales tax you paid on the initial purchase.
- Freight and delivery charges.
- Tangible personal property held for resale may be exempt in some states—for example, retail stores with an inventory of clothing for sale. In some states that inventory may be exempt. Other states may have a special method for calculating the tax of inventory. For a car dealership, for instance, it may be dependent on how many vehicles you have on the lot as of a specific lien date (typically December 31 or January 1); or it may be the number of cars you have on the lot averaged over 12 months.
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Intangible Property Tax Exemptions
Some states tax intangible assets. However, in most of those states, the companies for which this category would apply tend to be on companies whose assets cross county lines—like telephone companies, pipeline companies, wireless companies, airlines, railroads, etc. Some states tax the entire set of assets, both tangible and intangible (these tend to be the more onerous states for taxation); other states tax both the tangible real and personal property; still others tax only the tangible real property.
- The freeport exemption is specific to only certain states (i.e. Texas, Oklahoma, Georgia, etc.). In these states, assets kept in designated areas are not taxable, or they are taxed at different levels. For example, international traders who dock their vessels in a freeport-designated area can consider those vessels exempt from taxation. Alternatively, property held for a short time but moving through the state is another example of freeport exemption.
- Some states exempt certain classes of property by law. For example, North Carolina exempts residential real property held for sale by a builder. Michigan, by statute, exempts businesses located within eligible distressed communities. And Connecticut offers a property tax exemption for “Class I” renewable energy systems and hydropower facilities that generate electricity for private residential use.
While property tax exemptions place a limit on taxable value, an abatement reduces the amount of taxes owed. Abatements are often used as incentives to attract businesses to a particular area. An abatement might release a company from its property tax obligations for 10 years, for example, or exempt tangible or intangible assets from other forms of tax. Some jurisdictions also invoke payment in lieu of tax (PILOT), which means the company would provide payment equal to a percentage of the amount of taxes that would be paid if the property were not exempt from taxation.
The tax abatements Tesla received from Nevada for locating its Gigafactory there equate to about a billion dollars over 20 years! By Planet Labs, Inc. [CC BY-SA 4.0 (https://creativecommons.org/licenses/by-sa/4.0)], via Wikimedia Commons
How To Apply For Exemptions
You have three options when applying for exemptions:
- Make exemption determinations and submit tax returns with the exemptions included. If/when an audit takes place, present detailed backup (including a software study and other related paperwork) to support their decisions. Most organizations take this approach.
- File without exemptions included, but communicate with the assessor at filing time about assets you believe are exempt. This is the path of lowest risk, and the one I recommend. The worst thing that can happen is that nothing’s exempt, but at least you’ve been fully transparent with the assessor.
- File without exemptions included, and wait for the appeal phase to present your case and support for exemptions. In my view, this is the least desirable approach, but it does leave you with the least amount of exposure. The problem here is that you’ve left everything to the tail end of the process, leaving you with no choice but to participate in the appeal process. It can be a challenging path to pursue.
How To Make The Most Of Property Tax Exemptions
If you’re new to a jurisdiction, you’ll want to reach out to a consultant who has experience in identifying exemptions in your part of the country. Too many businesses aren’t familiar with certain exemptions and improperly file, so they end up paying more than necessary.
If your company is still looking for a place to call home, it may be worth seeking out a consultant who can help analyze the tax implications of various geographic locations, as well as help negotiate other incentives and credits—especially if your business will bring a lot of jobs to the area. There are numerous incentives that large companies can take advantage of if they know what to do.
And remember that tax policies are rarely as straightforward as they seem. A state that has high tax rates but taxes only real property may not be as costly as you think compared to a state with low tax rates that taxes everything. Think about what type of assets your company primarily owns. If you have a large number of intangibles and a low number of tangibles and you’re located in a state that taxes only the tangible real property, then your tax bill will likely be fairly low tax compared to the value of all your assets. But if you’re a public utility with a lot of intangible assets and very few tangible assets, your taxes are likely to be very high.
How Total Property Tax (TPT) Software Can Help
While software is no replacement for understanding your state’s exemptions and tax laws, it can help you manage the information and more easily apply it to your returns.
CrowdReason’s Total Property Tax software allows you to create a primary set of “rules” around exemptions—property classes that are exempt, types of taxable assets, and filing requirements for one jurisdiction vs. another. Building out this tax matrix in the software helps you classify and identify those assets, and gives you a simple way to report them separately. That reduces the time you spend managing your asset data, giving you back the time you need to continually reduce your tax bill.
In fact, TPT makes filing your property tax returns easier all around: All your property data and documents are securely stored in a central place and easy to access. All key jurisdictional addresses, deadlines, and depreciation tables are included and validated yearly. And TPT helps you complete tedious filing tasks in a fraction of the time, thanks to quick calculation of depreciation values and one-click form population.