Long-Term Business Property Tax Savings

Posted by Mark Battersby on Jun 6, 2023 12:00:00 AM

It is the rare self-storage owner, operator, manager, or industry professional who doesn’t attempt to keep the operation’s annual income tax bill to a minimum with tax planning, either year-round or end of the year. Why then is a bill for a tax that is one of the biggest expenses of many businesses, one that is prepared by the local taxing authorities, often paid without question?

The property tax is a local tax based on the market value of privately-owned property such as a self-storage facility’s land, buildings, and assets attached to that property. Unlike most taxes, property taxes are calculated by a government employee multiplying the property’s value and applying the tax rate to the property’s proportionate value.

Another facet of the property tax in many locales requires the business to provide the value of other business assets, including equipment and vehicles. In these cases, although local officials figure the final property tax bill, it is based on the value of the self-storage operation’s business property as reported by the business.

Many builders, developers, and other industry professionals own little or no property. However, just because the business rents its shop or other property doesn’t mean that property taxes can be ignored. In the Northeast, for example, studies show that property taxes range from 15 to 25 percent of the total rent paid by most businesses.

Low Property Tax Bills

Obviously, understanding the assets owned and rented by the self-storage operation and the local jurisdiction’s property tax rules can help ensure only the fair share of property taxes are being paid. Correcting the appraised value assessed by the local property tax jurisdiction, or ensuring current values of the operation’s other assets are reported correctly, can open the door to property tax savings for years to come.

The business property tax is a state or local tax based on the assessed value of the self-storage facility’s property, as opposed to its fair market value. Nearly all property taxes apply to real property. This includes land, buildings, and all improvements (often called “fixtures”) that can’t be removed without damage to the property.

Although the local property tax authorities calculate the annual property tax bill the self-storage facility is responsible for paying, there are a number of steps that can be taken to reduce the assessed value they base that bill on.

How Accurate Is That Assessment?

One of the reasons that business property taxes are so complicated is because they are variable. In other words, self-storage facility’s property is appraised by the local assessor using any one of several methods to arrive at the property’s assessed value. Some localities may use the market value vs. an appraised value. In all cases, however, a percentage of the value is used to determine the assessed value.

Some states impose a statewide limit on the maximum rate, but, even so, such systems are obviously ripe for errors. Local jurisdictions impose different tax rates for different types of property such as business property and residential property. However, distinguishing between real and personal property isn’t always simple.

While one error is often enough to warrant an appeal of a property tax assessment, comparing local properties may be more rewarding.

Basic Grounds For Appeal

It’s important to keep in mind that challenging the amount of property taxes is never going to be successful. Instead, what will be challenged is the assessment made by the municipality’s assessor. The assessors working for the taxing municipality have various levels of experience and expertise. This can often result with key details being omitted or mistakes made but not detected.

Not too surprisingly, there are literally hundreds of variables that can come into play when attempting to determine the value of property—from small details such as the total square footage (the overall property’s size), to smaller details such as recent improvements. Looking for details that the local assessor may have overlooked or misstated is a great starting point for an assessment appeal.

One of the best ways to gather evidence that property tax assessment was inaccurately prepared by the municipality is to look at how similar property has been assessed in the municipality’s public records. It’s important to compare similar properties in many different areas, such as the size of the property, additions, or modifications, etc. If similar property in the self-storage facility’s locality is discovered with lower values, it may be a case for an appeal.

Determining the market value of business property usually involves computing the earning potential and expenses which the local authorities using a percentage of this assessed market value to compute the tax bill.

If the business property was recently purchased, or data is available from previous purchases, there is a good chance that a case for appeal exists. Naturally, the property cannot have been purchased “under duress” and, thereby, losing ground as evidence.

Real Vs. Personal Property Taxes

All too frequently, the term “property tax” is associated only with homeowners. However, just as homeowners must pay property taxes on their house, owners, operators, developers, builders, and industry professionals must pay property taxes on their commercial real estate. Often overlooked is the fact that businesses must do the same with their business personal property.

A self-storage operation’s property taxes usually fall into one of two categories: real property and personal property. Real property includes stationery assets such as buildings and land. Personal property can be either “intangible” or “tangible.” Intangible property includes items such as trademarks, patents, copyrights, intellectual property, and software.

In addition to intangible assets, the business property tax is often assessed so-called tangible personal property owned by the business but not physically attached to a location such as:
• Business equipment;
• Business vehicles;
• General business tools and supplies;
• Furniture such as desks and chairs;
• Computers, printers, and scanners; and
• Movable assets and other tangible personal property necessary to conduct the business.

Business Property Tax Audits

On the downside, a Business Personal Property Tax Audit is an increasingly more common occurrence and can result in unexpected tax liabilities, penalties, and interest payments. In fact, some audits can cover periods of up to four years, resulting in a time-consuming information gathering process.

When auditors examine a business’ financial information, they frequently request items outside the scope of completing the audit of a personal property tax return, adding more time. Outside professionals often provide concrete data to support lower values and taxes, thus reducing the amount of financial information auditors have control over.

The Appeal

Although inefficient and time consuming, tracking down a jurisdiction’s tax information and requirements can reveal a number of errors. But, how can any owner, operator, manager, or industry professional seeking the lowest property taxes possible discover these omissions and errors?

In addition to the self-storage owner, operator, developer, builder, or industry professional’s own knowledge about its property, information on the property can also be found by contacting the assessor. Because, experienced or not, municipal officials are generally pretty smart and rarely intimidated or fooled into re-assessing a self-storage facility’s property.

Typically, filling out a couple of forms and submitting a letter or petition will kick-start the appeal process. Since the process can be different depending on the municipality’s location, ensuring that the requirements are followed is important.

This is usually a process that can be accomplished by the self-storage owner, operator, manager, developer, builder, or industry professional without outside help. If successful, the adjusted value becomes the new basis for the property tax for years to come.

Finding Pro Help

Although no one knows the self-storage operation better than its owner or manager, property tax appeals are time-consuming, complex, and require understanding the process that exists in every taxing jurisdiction where the business has property. Thus, there’s a need for professional help.

Hiring outside professional assistance can mean success, with less time consumed along with nominal fees. Fortunately, there are firms that will undertake an appeal on a contingency basis where fees are based solely on the amount of a reduced property tax bill over a period of years.

The Bottom Line on Taxes and Tax Savings

The local tax obligation of many self-storage facilities is the business property tax, a tax on the value of physical land owned as well as the personal property (or goods or products) used to operate the business. Ultimately, the business property tax is simply another piece of the taxes every self-storage business face.

Many owners, operators, developers, builders, and industry professionals, for whatever reason, are hesitant about appealing the property tax assessment. They may not want to offend the local assessor, feel appealing is morally wrong or potential unethical. In reality, however, appealing property tax assessments is quite common and the right thing to do in order to ensure the self-storage operation is paying only its fair share of property taxes.

Calculating and paying taxes, all taxes, is one of the more complicated and tedious parts of operating a business. Further complicating matters, since the business property tax is computed at the local level, a knowledge of business tax laws and the operation’s obligations is a necessity. As with all business taxes, however, that knowledge and attention to detail can help ensure the self-storage operation’s business property tax responsibilities are met at the lowest possible cost. Professional assistance may help.

Mark E. Battersby is a freelance writer specializing in finance and tax topics. He is based in Ardmore, Pennsylvania.