If your business owns property or real estate, you are probably used to getting a higher property tax bill than anticipated. You might also know that property tax is a deductible expense — one that can save you money when tax season rolls around.
Commercial property tax is known as an ad valorem or value tax because it is calculated based on the value of the property. However, the property tax value is not the same as fair market value and is determined by a property assessor as opposed to an appraiser.
How Property Taxes are Calculated
Property taxes are calculated using the value of the property, including both the land and the structures on it. Every one to five years, tax assessors will value the property and bill the owner a rate that follows the standards set by the taxing authority. This is why your property taxes may vary from year to year.
It’s important to review your annual tax assessment carefully. If you notice a significant uptick year over year, you may have grounds to appeal your assessment and ultimately lower your tax payment. Learn more about property tax appeals here.
Property Tax Deductibles for Businesses
Like many business costs, property taxes are considered a deductible expense. According to the IRS, a business expense must be both ordinary and necessary to be deductible. An ordinary expense is one that is common and accepted in your trade or business, while a necessary expense is one that is helpful and appropriate.
While property taxes are considered deductible, there are of course some limitations and restrictions when it comes to this expense. For one, you can only deduct the portion of your property tax that is levied based on the assessed value. In Publication 530, the IRS states:
“Most state and local governments charge an annual tax on the value of real property. This is called a real estate tax. You can deduct the tax if it is assessed uniformly at a like rate on all real property throughout the community. The proceeds must be for general community or governmental purposes and not be a payment for a special privilege granted or service rendered to you.”
Typically, you cannot deduct taxes charged for what the IRS calls “local benefits and improvements” meant to increase the value of your property. These include assessments for streets, sidewalks, water mains, sewer lines, and public parking facilities.
However, the IRS says you can deduct the portion of local benefit taxes if they are for maintenance, repairs, or interest charges. If you’re not sure what qualifies, check in with your local taxing authority or CPA for more information.
Generally, you can only deduct taxes in the year you pay them. This applies whether you use the cash method or an accrual method of accounting.
Get More Out of Your Property Tax Deductible with MountainSeed’s Property Tax Services
If you’re unsure about what portion of your property tax assessment qualifies as a deduction, let MountainSeed help direct you. We have a team of industry experts that are prepared to walk you through all of your property tax needs. Contact us today to learn more about our services.