Transcript Tangible Personal Property Something to Get a Hold of

Tangible Personal Property
Something to Get a Hold of
Patriot Properties, Inc.
What usually happens:
The taxpayer’s reported cost and date of acquisition (often of groups of
asset types) is utilized as the basis.
The trending factor is applied to get an indicated Replacement Cost
New (RCN).
The depreciation is applied based on the economic life of the asset and
the date of acquisition to get the depreciated replacement cost new
(RCNLD).
Compare the return received this year to the reported assets from last
year.
Some States:
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(FL is typical)
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Require an on site visit and a detailed listing of assets using replacement cost new from
manuals disregarding the taxpayers cost (in most circumstances)
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Tax inventory based on monthly averages/12
Have free trade zones (or similar), usually on Mexican and Canadian borders or near air,
freight, or sea ports. These Do not tax inventory IF is is not present for longer than a
prescribed time (30 days, 90 days)
In Tennessee the lessee is responsible for taxes
Boston tracks aircraft at the airport and prorates time the aircraft is in the Boston
airspace to tax the airlines.
Do not tax personal property at all!
What is Supposed to Happen:
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Get a List of the Assets
The “appraiser should systematically inspect the property”(1)
List the “description, manufacturer, model, age and general condition” of each asset.(2)
“For leased equipment: (record) the name and address of the owner/lessor, a description
of the equipment including name of manufacturer, date of manufacture, model number,
serial number, list price, and original cost if available, [lease number, terms of the lease
and whether it’s a capital lease (a purchase) or operating lease (rental agreement). If
possible, a copy of the lease should be obtained] (3)
Each year, “perform a field review to verify the business exists” (4)
Compare the return for the current year to the previous year.
“For a new account, compare the tax return with other returns filed by similar
business..” (5)
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Determine the Replacement Cost
Trend Historical Costs
The replacement cost can be determined by applying the trending or index factor to the
purchase price if the purchase price represented market value at the time and the item
was purchased new. This approach is flawed if either of the above is not true. There is a
perfectly valid way to get the replacement cost if the purchase price represents market
value and the age of the assets is known even though the assets were not new at time of
purchase. This will be explained in the “What Can Happen” Section. Efforts should be
undertaken to ensure that the reported purchase price is representative of market value.
(6)
Get Costs from Manuals
It is possible to get replacement costs for thousands of assets from a variety of manuals
and services as well as catalogues and newsletters. There are millions of varieties of
assets so this is not always going to provide a reliable source.
Get Costs From Comparable Sales
If there are sales of similar businesses or asset types, these can be used as the basis for
replacement costs. While it may appear there are few comparable sales from which to
get this information, there are in fact many sales to use since each acquisition cost that is
reported is a sale from which important comparable information may be garnered.
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Determine the Appreciation/Depreciation
Remaining economic life and effective age are a function of actual age and
condition as well as the total economic life. So one must make a judgment of
what the effective age or condition/actual age should be. Keep in mind, not all
items depreciate. Paintings, antiques, collectables may get more valuable. It
may be argued that this is not appreciation but replacement cost trending.
Either way, suitable adjustments should be made for assets of this type.
Apply the “Untrended Depreciation Schedule” provided by the DOR or
comparable schedule to the asset along with the condition/age or effective age
judgment made above to get the depreciation percent.
“The Property Appraiser should make additional adjustments for unusual
physical depreciation of property when justified. Some of the conditions for
which adjustments may be necessary are: ..prolonged exposure to corrosive
materials, poor maintenance, excessive use.. Such adjustments should be made
on an individual basis and only after physical inspection of the equipment and
examination of the maintenance records” (7)
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Determine the Just Value
“..the property appraiser should consider for use at least one of the following approaches
to value as may be appropriate for the property being valued.” (8)
Comparable Sales
This may be appropriate for a comparison of entire business sales or individual assets.
The best sales are purchases of assets new because sales of used assets may have other
factors involved in the sale such as the seller’s duress and related costs of removal and
reinstallation. The costs reported in the similar tax returns are a good source but are
really more tied to the Cost Approach since depreciation can vary and by using the
trending schedules we can infer a RCN.
Cost Approach
Once a replacement cost has been determined from above, apply the depreciation
determined from above to get an indicated value.
The Income Approach
This involves determining a gross income attributable to an asset and deducting relevant
expenses to get an net income. This is then capitalized using a rate that considers the
yield to the investor, recapture, interest on the investment, risk and other factors. This
may be appropriate for leased assets where you have a known rent and lease term. It can
be validated against known costs but if you have known costs, use them rather than the
indication shown through the income approach.
• What Can Happen
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There are lots of “shoulds” in the above. Of course one should systematically inspect the
properties and should visit each account every year and should track assets individually
and in great detail and examine the three approaches to value in deciding on the final
value of each asset. But this is unrealistic because taxpayers often report groups of
assets together such as x dollars of equipment in 2002 so now individual breakdown is
possible without further information from the taxpayer and because it would require a
great deal more manpower and/or cost and/or time (unless you can afford a giant staff or
have only a few accounts to deal with).
You can however make improvements by better using your existing information and by
possibly adding a few new fields to your asset data.
Lets focus on the answers to these few questions:
How can I get a reasonable value indication for non-reporting accounts? Or how can I
check to see what accounts may not be reporting accurately?
How can I get an indication of RCN from other accounts?
How can I determine the proper trend factors and depreciation factors when the taxpayer
has purchased used assets?
Add or Utilize the Year Installed AND the Year New
Add or Utilize the Square Footage
Used Assets
Same Restaurant with 3 scenarios. Owner keeps the TPP, Owner sells and TPP is treated as if purchased new, TPP receives adjusted depreciation
The TPP should have the same VALUE regardless of ownership changes.
Original
Paid
Year
Depreciation
Age
%Good
10 yr
1
92
2
84
3
76
4
67
5
58
6
49
7
39
8
30
9
24
10
21
11
20
12
20
13
20
14
20
15
20
Trend Factors
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
TaxYr
1
1.01
1.02
1.04
1.04
1.05
1.07
1.09
1.13
1.16
1.19
1.22
1.25
1.28
1.35
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
New Owner
11500
1995
30000
1987
Original Owner Keeps
Trended
RCNLD
40500
40200
39900
39300
39300
39000
38400
37800
36600
35700
34800
33900
33000
32100
30000
8100
8040
7980
7860
7860
8190
9216
11340
14274
17493
20184
22713
25080
26964
27600
Usual Way
Trended
12535
12420
12305
12075
12075
11960
11730
11500
RCNLD
3761 *
4844
6029
7004
8090
9090
9853
10580
New Way
Trended
RCNLD
12535
12420
12305
12075
12075
11960
11730
11500
8357
8280
8203
8050
8050
8372
9200
11500
*New owner receives more depreciation
Divide the depreciation for the actual age by the amount of depreciation effective when purchased
To Check Reasonableness of Total Values for
Accounts
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• Group by Business Type (Use Code)
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• If you have the square footage, divide the value of each account by the
square footage occupied and get the average $/s.f. Multiply this time
the square footage of the subject and compare to its value.
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• If you don’t have the size, just get the average value by Use Code and
compare this to your subject.
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• This can be done on a mass basis without too much effort if you have a
reasonably open system and can get at the data. You can generate these
predicted average values and list only those accounts that vary by, say,
more than 50%.
To Generate Assets on Non-Reporting Accounts,
Build and Apply Models
Use Your Data
Get data from your friends
• Models can be built by using common sense and
experience or by taking a particular use code and reversing
out the depreciation to get the RCN. This can be done by
taking the value of the asset and dividing by the percent
good used from your depreciation. See what asset types are
generally applicable to this use code and make a model for
this use code containing the set of assets along with the
average RCN per square foot (or just the average RCN if
size is not available).
• Pool your information with other counties and build
a bigger database for your models!
Just How Much Do You Need To Know About An Asset?
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Tax Year
Account ID
Unique ID
Line Number
Asset Type
Dimension 1
Dimension 2
Dimension 3
Year New
Year Acquired
Date Disposed
Source of info
Reported Cost
Override Value
System Derived RCN
RCN from table
Taxpayer Value
Method
Quality
Condition
Other Depreciation
Other Depreciation note
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Scheduled Trend Factor
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Override Trend Factor
Scheduled Depreciation Schedule
Override Depreciation Schedule
Previous Value
Value Inclusion
Exclusion Percent
Associated TPP Account
Make
Model
Serial Number
Park/Complex ID
Registration Number
Lease from date
Lease end date
Lease amount per month
Associated Real Property ID
Notes
District Code
(Total Units)
(Total Depreciation)
(Value)