Managing the Property Tax on Your Business
Most businesses have recently finished their tax year and are closing their books and analyzing expenses. Part of this process is usually reviewing what expenses can be reduced in future years to add profits.
Many times, the amount paid for personal property tax is not even considered in this process. However, effectively managing this tax can have a significant impact on the final amount assessed. This article will explain a few simple steps you can take to ensure that you’re not overpaying your company’s personal property tax.
The Form of List (FOL) is a document used by Massachusetts cities and towns to calculate the local personal property taxes of businesses. The form, which is issued early in the year, is often completed with very little regard. Unfortunately, this particular form can have significant tax consequences.
When completing the FOL, be sure to report a value for all the assets listed on your books. No asset has a zero value in the eyes of your city or town. Be mindful of this and make sure that the assets listed on your books accurately represent those assets you actually possess — there is no need to pay a tax on something you no longer own.
The majority of local assessors will assign a fair market value to the assets on your books, none of which will have a value lower than 10% of the original cost. This makes it very important to write off all of those old computers, that broken-down forklift, or even that traded-in copier still included in your fixed assets.
Another issue to keep in mind is that some local assessors require that the disposal of assets be formally communicated to them. Simply leaving those assets off the listing doesn’t ensure that they will be removed from the assessor’s file. Businesses can request a list from the assessor summarizing their assets, their cost, and their assessed value. Use this list to cross out assets that have been disposed of (or abandoned) so they are removed from your base taxable amount.
If you are a Massachusetts corporation registered with the state, you pay a tangible-property excise tax on your state income-tax return for the net book value of furniture, fixtures, and inventory.
Local assessors should assess you only a personal property-tax bill at the local mill rate on non-manufacturing machinery owned. Care should be taken to ensure that items being listed as non-manufacturing machinery (computers, copiers etc.) are not also listed under furniture or fixtures on your state tax return. This will result in a double tax.
If your business is not incorporated (a sole proprietor or partnership, for example), the city or town can tax all of your fixed assets and inventory at the local mill rate. It could be advantageous to consider the effect of this difference. Local property rates can be about $40 per thousand of fair market value versus the state rate of $2.60 per thousand of net book value.
This year, Massachusetts has introduced a new filing requirement. Based on this new obligation, corporations and LLCs taxed as corporations (including S corporations) must now file a “Certificate of Entity Tax Status” with the MA DOR annually. Companies who have a web-file business account with the state will now see a new tab for “Annual Certificate of Entity Tax Status,” which allows them to submit the information needed to be included on the MA DOR Annual List of Corporations for Property Tax Status, also called the Corporation Book.
This list is examined by local assessors for a few different reasons. The first reason is to determine if your business is a corporation, preventing a local tax on your inventory, furniture, and fixtures. The second reason, and perhaps the most important part of this process, is to determine whether or not you are in fact a classified manufacturer.
Classified manufacturers receive a local property-tax exemption on their machinery in addition to their inventory, furniture, and fixtures. As outlined above, the differences in the taxable amount and tax rate make this very beneficial. So how do you go about determining whether or not your business has the classified manufacturing status? If you don’t have it, how do you go about getting it?
On the Corporate List, there is a code to distinguish companies that are classified manufacturers in Massachusetts. If your company is not distinguished on the list as such, you need to file a Form 355Q with the MA DOR for status approval. There are certain qualifications that must be met in order to be considered a classified manufacturer in the Bay State.
Generally, a corporation may be classified as a manufacturing corporation for any calendar year if it is in existence and engaged in manufacturing in Massachusetts as of Jan. 1 of that year. A corporation is engaged in manufacturing if both of the following requirements are satisfied:
1. The activities of the corporation involve manufacturing; and
2. The manufacturing activities performed by the corporation are substantial.
Manufacturing is defined as the process of substantially transforming raw or finished materials by hand or machinery, and through human skill and knowledge, into a product possessing a new name and nature, and adapted to a new use. This is a facts-and-circumstances test emphasizing the importance of what information you provide when completing the Form 355Q.
There may be other challenges to overcome, but this is a good starting point when determining whether your company could be eligible to receive the local property-tax exemption on machinery. If you believe that your company meets any of the requirements listed above, you should be sure to discuss this with your accountant or tax advisor. Do not assume that you should receive an exemption without the state’s approval; cities and towns are aggressively working to identify businesses not qualified for the local exemption either partially as a corporation or more extensively as a classified manufacturer.
When that Form of List comes in the mail this year, be sure to pay attention and, as always, consult your tax advisor.
Dan Eger is a tax associate for the Holyoke-based public accounting firm Meyers Brothers Kalicka, P.C.; (413) 322-3555; [email protected]