When people think about commercial property taxes, they picture office buildings, shopping centers, and so on. But what most people don’t know is that property taxes aren’t limited to real estate.
Each year, commercial property owners must file their returns for their business personal property alongside their property taxes. Below, we’ll go over what you need to know about business personal property, how it affects your taxes, and what you can do to make sure you stay compliant.
What is a Commercial Property?
First things first, what is a commercial property?
Commercial properties include retail shops, warehouses, industrial buildings, office buildings, shopping malls, hotels, and more. Generally, it refers to buildings that are used for activities related to business.
Commercial properties are known for being more financially rewarding than other types of investment properties, such as single-family homes and multi-family units, because they are intended to generate profit.
What is Business Personal Property?
Business Personal Property (BPP), also known as ‘business contents’, refers to the transportable items within your commercial property. It includes furniture, furnishings, computers, equipment, machinery, office supplies — generally, everything movable and tangible that can be found inside your commercial property.
Examples of BPP include:
- 3D Printers
- …and a lot
Every business has BPP that contributes to its operations. In most jurisdictions, commercial property owners are required to pay property tax on their BPP. Keep in mind that some states have more comprehensive personal property tax procedures than others. To be certain, consider asking a professional property management company for your state’s exact guidelines.
How Does Business Personal Property Impact Your Taxes?
Many commercial property owners fail to comply with the requirements for filing their personal property taxes. When this happens, the appraiser may impose penalties as a consequence of your non-filing or improper filing. This penalty may amount to 10% of your total property taxes for the current year.
If the appraiser finds that you filed a false report with the intent to evade tax, you may face an additional penalty of 50% of your total property taxes for the current year.
Take note that you are expected to submit your business personal property tax form not later than the 15th of April. This form will be used to calculate how much you owe in business personal property taxes. To make sure that you don’t incur any penalties, get in touch with your local tax authority or ask a property manager.
How to Create a Proactive Commercial Property Tax Plan
#1 Understand your jurisdiction’s requirements
Before preparing your annual tax returns, it’s important to understand your state’s business personal property requirements. If you’re working with a team, consider assigning someone to research your state’s compliance procedures and deadlines. Better yet, hire a property management company with in-house accounting personnel who can manage your taxes on your behalf.
#2 Keep records of everything
Anyone who has filed their property taxes before understands how crucial it is to keep records of everything. Remember, the information that you indicate in the form must be supported with the property documentation. While not all appraisers or assessors will scrutinize your form, there is still a possibility that they will request more information.
#3 Review your business personal property
Do you own items that have been disposed of in the past year? Are there items that you’ve transferred to another location? Do you have irreparable equipment that is still on your list of assets? These are called “ghost assets” and should be taken off of your list, otherwise, you may end up paying taxes on property that you no longer own or use.
Be sure to inventory your assets before tax time comes. We recommend reviewing your business personal property monthly or quarterly.
#4 Understand external obsolescence
Obsolescence is an external force that affects the value of your business personal property or your commercial real estate investment. Generally, it is a type of depreciation that doesn’t consider wear and tear. Instead, it affects something’s value because there is a decreased demand for it. In other words, it has become obsolete.
When filing your taxes, be sure to leverage obsolescence. You can do this by reporting the accurate value of your personal property, taking into consideration the value decrease caused by obsolescence. If you don’t do this, you may end up overpaying.
Benefits of Investing in Commercial Real Estate
Don’t let the complexities of property taxes discourage you from investing in commercial real estate! As long as you’ve got a reliable property manager by your side, you can survive tax season stress year in and year out. Here are some of the advantages of buying commercial real estate:
#1 High-income potential
Commercial properties generate an annual return of 6% to 12% of the purchase price. In comparison, single-family homes generate around 1% to 4%. If you’re looking to invest in properties that have a high earning potential, commercial properties are an excellent choice.
#2 Less demanding
Businesses usually aren’t open 24/7. If you invest in a commercial property, you will only have to work when your tenants are working. This means you won’t have to worry about emergency repairs in the middle of the night.
#3 Aligned goals with tenants
Commercial tenants need to maintain their storefront or office space. This is because, just like you, they are engaged in business. This means that appearances matter. If they don’t maintain their rented space, they may lose business. As a result, they can help you maintain the quality of your commercial property.
Partner with the Pros
If you don’t have the time and resources to prepare your property taxes, it’s best to partner with a professional property management company. At Luxury Property Care, we have tax experts who understand the specific requirements of your jurisdiction. Plus, we can leverage obsolescence and other deductions to your advantage, helping you save as much money as possible when tax time comes.