Paying and Deducting Your Business Property Taxes
Business Property (Real Estate) Taxes
What are Business Property Taxes?
Businesses pay property taxes on real estate in the same way as individuals, on the assessed value of that property.
If your business owns real property, 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 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 tax is called an ad valorem (value) tax because it is calculated on the value of the property. The value of a property for property tax purposes is not the same as fair market value. The value is determined by the property assessor based on assessed (calculated) value.
An assessor is not an appraiser. A business appraiser determines the fair market value of a property for the purpose of a sale or a loan or insurance.
How are Property Taxes Calculated and Paid?
Property taxes are assessed by local entities - towns, cities, counties, villages—for local purposes, such as schools, roads, improvements in infrastructure.
When you purchase real estate for your business, the property will be registered with the appropriate taxing authority and you will receive information on the changes in your assessed value and the amount of tax you owe each year.
After you receive the assessment, you will receive the tax bill based on that assessment. Yes, it's possible to contest the assessed amount. The assessment bill should have information on the process for doing that, or you may need to contact your locality for information on this process.
Can I Deduct Property Taxes Paid by My Business?
The IRS says you can deduct property taxes, but they put some limitations and restrictions on what portion of your property tax is deductible as a business expense:
You can deduct the portion of your property tax that is levied based on the assessed value.
You cannot deduct any portion of your property tax that is levied on "local benefit." The IRS says this is
"the taxes charged for"local benefits and improvements that tend to increase the value of your property. These include assessments for streets, sidewalks, water mains, sewer lines, and public parking facilities. You should increase the basis of your property by the amount of the assessment."
Just to confuse the matter even more, the IRS says you CAN deduct the portion of local benefit taxes if they are for maintenance, repairs, or interest charges. You'll have to look closely at your real estate tax bill and separate it out into the taxable and non-taxable portions.
Check with your local taxing authority for more information on real estate taxes on your business property. Since property taxes are specific to each state, you might also go to your search engine and type in "property taxes [state]" for more information.
Property Taxes on a Business Sale
If you buy or sell a business, including business property, or you buy or sell just the business property, both the buyer and the seller must share in the property taxes, according to the portion of time each owned the property during the tax year.
See IRS Publication 535 for more details on deducting business property taxes.