Every business owns property. Even the smallest business has property in the form of a computer/laptop, probably a desk, maybe filing cabinets and sometimes a business vehicle. In this article, we'll look at business property, how this property affects the value of your business, how business property affects business taxes, and how to keep records on business property.
What the IRS calls "property" for tax purposes, your CPA calls "assets" for accounting purposes. Both are general terms for things of value owned by your company.
Types of Business Property
Business property comes in several different types:
Real property, also called real estate, is property that includes land and buildings, and anything affixed to the land. For a business, real property would include warehouses, factories, offices, and other buildings owned by the business. Real property only includes those structures that are affixed to the land, not those which can be removed, such as equipment.
Real property may also be determined to include:
- Whatever is beneath the surface of the land, like minerals, natural gas, and oil
- Rights to the use of property
- Leasehold improvements (improvements to the property), since these improvements cannot be removed.
Personal property is any property not attached to the land or to structures on real estate. In other words, it's movable. Some examples of personal property owned by a business are equipment, furniture and fixtures, and vehicles.
Listed property is a specific type of personal property of a business that comes under increased scrutiny by the IRS. Property of this type may be used for either business or personal reasons, so the IRS more carefully monitors deductions for payments for this type of property and for deductions for use of this type of property. Included in listed property are business vehicles, computers and other electronics.
How Business Property Affects Business Value
Accumulated depreciation on personal property (real property is not depreciated) is shown on the asset side of the balance sheet, so the net value of the specific property is shown.
Selling Business Property
Because the sale of business property affects income taxes and real estate taxes, the sale of business property must be recorded and included on your business tax return
IRS Form 4797–Sale of Business Property is used to record:
- the sale or trade of property used in a business for at least a year
- Involuntary conversion of property held over a year
- Ordinary gains and losses on business property
- Gain from the disposition (sale) of specific types of business property, and
- Recapture of property under Sections 179 and 280F(b)(2) when business use drops to 50% or less
The sale of business property may result in a short-term or long-term capital gain or loss.
How Business Property Affects Business Taxes
Property Taxes by Localities
If your business owns real property (land and buildings), you must pay property tax on this property. In the same way as individuals pay property tax on the assessed value of their homes, businesses pay property tax on the assessed value of their real estate (land and buildings). If the real estate is sold, the tax for the year is distributed between the previous and new owners, based on how much of the year they owned the property.
Property taxes are assessed by local entities - towns, cities, counties, villages - for local purposes, such as schools, roads, improvements in infrastructure.
Each state coordinates and oversees property taxes in all localities. Three types of county officials are involved (with different titles in each location):
- Property appraisers establish the value of your property.
- Tax collectors send tax bills, collect payments, approve deferrals and exemptions
- A value adjustment board hears and rules on challenges to a property's assessment, classification, or exemptions.
Depreciation on Business Property
The most important tax benefit to buying business property is that you can take a depreciation expense on long-term business property, like equipment, vehicles, machinery, computers, and furniture. The federal tax laws give incentives to businesses for buying property, in the form of accelerated depreciation.
This depreciation allows you to take all or part of the expense of buying the property during the first year. The two types of accelerated depreciation are Section 179 expenses and bonus depreciation. The amounts you can deduct each year are changing, as are the requirements, so check with your tax professional before you make any buying decisions.
Depreciation on listed property may need to be taken using the alternative depreciation method. This method requires an increase in the number of years over which a property is depreciated, decreasing the annual deduction.
Expenses for Use of Business Property
Expenses associated with personal property. Expenses for use of personal property (such as business driving expenses) are legitimate deductible business expenses, as long as you can show that these expenses are truly business-related.
Interest expenses on the sale of business property are also included in your business tax return.
Keeping Records on Business Property
It's important to keep excellent records on the purchase of all types of business property, as well as records on mortgages, liabilities, and expenses associated with the purchase and maintenance of all types of property. As noted above,