Ad Valorem Tax – The Sleepy Tax

When we ask clients and friends for feedback on our blog posts, the most frequent comment is “Tell me more about how I can save on income tax?” This is closely followed by “How can I save on estate tax?”
We love these questions and we will always try to respond, but today we want to discuss a sleeper tax that most of you pay which is Ad Valorem or property tax. This is a tax that the state, county and city imposes on the value of real estate or business personal property.
Real Estate 
With all real property, you need to be sure that it is correctly classified. There are current use valuations available. For example, if you own the old family farm and are growing timber, the assessor may value the property assuming you sold it to build a shopping center. You can request it be valued in its current use. Similar provisions exist for Historic buildings or sites. The point is only you understand the specifics of your property. Additional information is available on the Department of Revenue’s web page
Business Personal Property Ad Valorem 
Annually businesses are required to file a return listing business personal property for assessment. The starting point is usually the business’s depreciation schedule. The assessor’s office starts with the cost, date acquired, and the class of asset. A formula is then used to value the assets and depreciate them by class. For example, computer equipment is depreciated faster than factory equipment. If we are preparing the return for you, we send you a copy of the depreciation schedule and ask that you update it. The return should include assets owned on October 1. Why October? It’s the first day of the governments’ fiscal year. Care should be taken in several areas. First, it is important to properly classify an item. If you add an air conditioning unit to cool an area of your plant for a specific manufacturing process, you may think of that unit as equipment when in fact, it is part of the building and has already been taxed with the real property. Second, businesses leave equipment on the books they no longer have. It’s fully depreciated so what difference does it make? Well, it continues to add to your ad valorem base. We don’t know what property most clients have, but are willing to bet the laptop purchased in 1994 isn’t really there. Finally, you may have items going the other way. For federal and Alabama purposes your business probably used a $2500 de mininimus floor for your capitalization policy. So, the $1900 printer you purchased is expensed on office expense.
If we are preparing your return, please take a minute to help us update the depreciation schedule. It may only save you $100 next year in ad valorem taxes, but remember that would reoccur every year into the future. As always, if you have questions, please contact your Dent Moses advisor. We are here to help.
Please contact your Dent Moses advisor or our office with questions or for more information.