Accounting & Finance
Business Property Taxes: Small Business Deductions and Explanation of Property Tax
Small businesses pay property taxes on the real estate the business owns. Taxes are based on the assessed value of the property, and it’s important for small business owners to carefully review the amount of taxes they’re required to pay.
Land and buildings both fall under real property.
Taxes are Based on Assessed Market Value
Real property has an assessed market value. What this means is that the value isn’t fair market value. Rather, a tax assessor will come out to the property and calculate the property’s “assessed value.”
How is this value calculated?
Jurisdictions will come out to a property, often once a year or every other year, and assess the value. Some jurisdictions only assess the value when the property is sold, and this can be very advantageous in a growing area.
Government officials will conduct the assessment, and while it may change, the basics are:
- The assessor will determine the cost to replace a building based on current materials and labor. Reasonable depreciation amounts are included in the assessment.
- Comparisons will be conducted for the price of the property using similar property sales in the area. Upward and downward real estate trends will factor into this price, too.
- The income method may also be used, which is the amount of income the property earns adjusted for other factors, such as maintenance, taxes and operating costs.
“Small business owners are squeezed from every direction as they try to turn a profit while faced with rising expenses and dwindling revenues. Property taxes can be one of the largest cost factors, and also the most frustrating. You receive your tax bill and feel as though there is nothing that can be done,” claims Law Offices of Gary H Smith, P.C..
Disagreeing with the Assessment
Tax assessments may be argued, allowing you to state that the assessed value of your property is inaccurate. What this argument does is allow you to call for a reassessment and hopefully lower your tax burden.
The original assessor may have erroneously marked up the price of your property.
But there are also times when factors, such as the recent sale price of similar properties, changed and made your property less valuable. In many circumstances, the property taxes cannot be raised any further, but they can be lowered.
Property Taxes and Business Sales
When you sell real property or buy it, the property tax bill must be split. For example, let’s assume that you purchased real property in June, you would be responsible for paying property taxes for June through December 31.
The previous owner would pay from the first of the year until the sale date.
The buyer and seller will pay taxes on the amount of time they owned the property during a given year.
Tax deductions for the real property a business owns is available. You must properly pay your taxes to claim these deductions. Limitations are present on deductions, but these limitations are all circumstantial. You can read the limitations on the IRS website.
Each state has its own specific property tax rules, so while you can deduct property that is not “local benefit,” it’s better for a local tax expert to help.
Taxes for local benefit are complex, and this means that improvements made to the property can’t be deducted, but these improvements may be:
- Sewer lines
- Water lines
So, a qualified tax attorney remains the best person to contact to determine how or if you can deduct your property tax expenses legally.