Nancy A. Geary, CPA, CLFP, is a shareholder at the public accounting firm of ECS Financial Services, located in Northbrook, IL.
There are more than a few challenges for leaders of equipment leasing companies. Nancy A. Geary of ECS Financial Services provides some advice on personal property taxes and concerns leasing companies should keep in mind and strategies to tackle such obstacles.
No one ever said that running an equipment leasing company is easy.
Consider the challenge of collecting, reporting and remitting personal property taxes. Personal property tax is charged on tangible personal property (not real estate) and is levied by the local taxing jurisdiction where the property is located on the assessed value of the property. As of today, more than 5,000 local jurisdictions in the U.S. levy some form of personal property tax.
But, because each jurisdiction has its own rules for how personal property taxes are assessed, exemption amounts that apply and varying tax rates, compliance for companies that do business in many jurisdictions becomes infinitely more complicated.
That creates special challenges for equipment leasing companies, where multi-state business is common. In fact, personal property tax can become a logistical nightmare for the industry if not handled properly.
Managing personal property tax for equipment lessors requires a focused effort to ensure that you are in compliance and properly passing on any taxes to the lessee. Consider the following five factors that leasing company executives should always keep in mind.
Reporting and Assessment Dates Vary
As a general rule, equipment leasing companies have a responsibility to report all equipment they have under lease in states that levy personal property tax as long as they hold title to the equipment. If the lease agreement states that the lessor only holds a security interest in the equipment, then they are not required to report it. Additionally, in certain jurisdictions there may be special rules, such as “conditional sale leases” being reported by the lessor but the tax bill being levied directly on the lessee.
There are five specific assessment dates for personal property tax across the many jurisdictions in the U.S.—December 31st, January 1st, April 1st, July 1st and October 1st—and a jurisdiction will apply only one of these when assessing personal property tax.
The rule for assessing is straightforward—if the equipment on lease is in service in that jurisdiction on the assessment date then the lessor must report that equipment on their return and tax will be assessed and due. Personal property tax assessment and bills are not prorated based on the amount of time the equipment is in service during the assessment period. If the equipment is in the jurisdiction as of the assessment date then the full tax amount for that year is due.
Every year jurisdictional requirements must be reviewed to determine if new rules need to be applied, such as exemption amounts being changed or added, or return due dates changing.
Each Jurisdiction Has Its Own Reporting Rules
Returns need to be assembled and filed in order to meet each jurisdictions’ deadlines. For an equipment lessor, the first step in this process is to create a detailed asset file, which contains data such as location of assets, type of assets, acquisition date and asset cost. Generally, this can be produced from any leasing software a company may use to maintain and service its portfolio. This file should be reviewed for accuracy and the data should be cleaned up prior to assembling or filing any returns.
It is highly recommended that a leasing company explore one of the many different personal property tax reporting software options available, as this will provide a greater level of efficiency and accuracy. Beyond that, outsourcing the process to a company that has experience in personal property tax processing for the leasing industry is another good option, since there are nuances in the process that are specific to the industry.
The next step is to verify the taxability of each asset, the correct category for each asset and that each asset is being reported in the proper jurisdiction. Once this has been completed, personal property tax returns can be assembled. After the tax returns have been prepared, a reconciliation should be performed to ensure that the source data matches the returns. Disposal lists are then created for any assets that have been sold during the past year or for those assets that have been moved to another jurisdiction. The disposal list will be included with the return so that the taxing jurisdiction knows to remove that asset from their assessments and bills. The returns are then mailed by the due dates so as to avoid any late filing penalties.
Assessment Notices Need to Be Processed Annually
Every year, an assessment notice is sent by the local jurisdiction’s assessor that indicates the assessed value of the assets reported on the personal property tax returns. Most jurisdictions base their assessed values on a percentage of equipment cost and the number of years since being placed in service in that jurisdiction, so it is important to review the notice for accuracy. If any discrepancies are found the assessor should be notified.
At times it will be necessary to obtain the assessment workpapers to reconcile your records to those of the taxing authority. Sometimes companies need to file specific protest forms if there are differences in data that cannot be worked out with the assessor’s office.
The assessed value that is listed on the assessment form is then tracked in the equipment leasing company’s records for each individual asset, along with the assessor and collector’s account number. This allows a company to track the assets properly so that the tax bills can be correctly allocated to the lessees.
Processing Tax Bills Involves Several Steps
After a specified period of time, the tax assessor will send the assessment information to the jurisdiction’s tax collector. The tax collector will then send personal property tax bills listing the amount of tax due on the assessed value of the property to the lessor. For some jurisdictions, no assessment notice will be sent, so the tax bill serves as both the assessment notice and the tax bill.
When an equipment leasing company receives those bills they need to be reviewed for accuracy and reconciled either to the assessment notice already received or to the company’s leasing system if no notice was received. If there are inaccuracies then the tax collector and tax assessor need to be notified so they can adjust their records accordingly.
After the review process, if assessed values of assets have not already been entered into the company’s tax reporting software, then they need to be entered based on the tax bill received. I recommend creating a spreadsheet with the breakdown of each bill by lessee so the leasing company has a record of tax due by lessee. Check requests are then processed to pay each of the taxing jurisdictions on a timely basis.
The final step is for the leasing company to bill the personal property tax to each of its lessees based on what was paid out. While personal property tax is generally a tax on the company holding title to the equipment, most lease contracts pass this cost on to the lessee. Remember, also, that in many jurisdictions the property tax invoiced may be subject to sales tax, so be sure to factor that into the balance due.
Detailed Record Keeping Is Critical, for a Number of Reasons
There is always the possibility that one of more of the taxing authorities will initiate an audit of your account. That is why it is imperative to be very organized and keep detailed records of all activities surrounding personal property tax. At those times it is also a good idea to enlist the assistance of an accounting firm that specializes in these matters or has experience in dealing with audits of this type.
Another important point to note for leasing companies regarding personal property tax relates to situations where a customer requests an early payoff of their lease contract. If the current year tax bill has not been received but the payoff will occur after the assessment date, the leasing company needs to include an estimated amount in the payoff for the personal property tax that will be assessed for the year. This is a way to ensure that additional costs are not burdening the leasing company when an early lease termination occurs.
From the standpoint of record keeping and organization, keeping a calendar with tax return due dates, assessment dates and tax bill due dates is a great way to stay on top of upcoming deadlines. It is also a good idea to record the total assessed value from the assessment notice received on the calendar to quickly compare the tax bill against, and maintain this information on a state and jurisdiction name basis for ease of reporting and monitoring of activity for internal purposes. The dates when returns are completed and mailed can also be noted on the calendar as an indicator that all items have been completed on time.
There are a multitude of important items that an equipment leasing company needs to be concerned with when it comes to personal property taxes. Following the above steps and consulting with experienced tax professionals will allow a company to be in compliance with its personal property tax requirements in an efficient and effective manner.
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