Expert Understanding of Corporate Capitalization Policies Reduces the Risk of Over Taxation and Back Assessments

By: Seth Krchmar | National Director of Personal Property

As a corporate tax professional tasked with the reporting of fixed assets on property tax returns, you should understand your company’s capitalization policies. The capitalization policy defines the process for acquisition and approval of capital items or projects. The policy should establish a floor for the cost of an asset before it is capitalized and becomes an asset on the fixed asset listing.

If the floor of the cost of an asset to be capitalized is $5,000, you should be aware that any assets with a cost less than that floor will be expensed, and that most states require the reporting of expensed equipment. If reporting to an audit state, this is an area that auditors frequently target as they know it is often overlooked. If these expensed assets have not been reported, your company is at risk of non-compliance resulting in additional property tax liability and penalties.

Once an asset is capitalized, it is important to understand the guidelines used by the fixed asset accountant. They often capitalize multiple assets from a specific project as one asset with the total cost of the project. Included in this cost may be items that are not taxable, or they may be considered real property vs personal property. When a component of this project/asset is disposed, it most likely is not being removed from the total fixed asset capitalized cost. Both scenarios result in overpayment of property tax year-over-year.

It is important to note that the Fixed Asset System is used by your company to calculate and track accumulated depreciation and expense for both financial and income purposes, property insurance purposes, and other financial reporting purposes. These purposes are usually in conflict with the property tax reporting requirements.

These are just a few examples of common mistakes Invoke Tax Partners discovers as we review a company’s financials, fixed asset listings, property tax returns, and assessments. We work with our clients to fully understand their internal policies and drill down to the details of areas that are often overlooked by internal tax departments. Most tax departments are too overloaded to fully investigate these potential under or overreporting pitfalls, making the utilization of a outsourced consulting firm a clear choice for bottom-line property tax savings. Learn more about Invoke Tax Partners’ approach to business personal property tax savings or contact us today to consult with our experts.