Small Businesses and Personal Property: What to Know
Personal property for a business or individual is a property that the business or person owns. This is not affixed to or affiliated with any land. It is also movable. In other words, personal property is any type of property except real property (like buildings and land).
When it comes to personal property for a business, this involves almost everything the business owns. This includes manufacturing equipment, computers, furniture, and even the smallest things such as staplers, calculators, and hole punchers bought and used for running the business.
Types of Personal Property
There are three types of personal property: tangible, intangible, and listed.
Tangible personal properties are something you can touch or feel. In general, this includes equipment, furniture, vehicles, and the like.
On the other hand, intangible personal property involves things that cannot be touched or felt, like bonds, securities, and other intangible assets.
A specific type of property you should know about is the listed property. It involves property that can be used either for personal or business purposes.
Personal Property and Business Taxes
If you buy personal property, this automatically means it is a deductible business expense. Also, in some cases, the personal property cost can be counted as a business expense during the first year of the said purchase. However, most of the time, the purchase price is spread out over the useful life or shelf life of the item or property. Furthermore, most states do not tax intangible personal property.
The process of spreading out or stretching the expense is called amortization (under intangible property) or depreciation (under tangible property). Each item you buy covered by personal property needs to be amortized or depreciated based on a schedule. For example, a listed property most likely must be depreciated by using the alternative depreciation method.
The alternative depreciation method increases the number of years over the amount of time the property might be depreciated. By doing so, the yearly depreciation expenses will decrease. Furthermore, it would be best to ask for help from an accountant in calculation depreciation since it can be very challenging.
How Business Personal Property Impacts Your Property Taxes
Generally speaking, all are required to pay their taxes. When it comes to business personal property, which includes manufacturing property tax, business owners must fill out a tax form yearly for each jurisdiction. If you fail to fill out the form correctly or fail to meet personal property qualifications, your business will be at risk. Because of this, the assessor will look into the value of your business’s personal property and then add interests and penalties for non-filing or improper filing.
This will give rise to a possibility of rejection when it comes to a Freeport Inventory Exemption. When this happens, you already have lost control over your tax liability. In order to help mitigate the risk, it would be best to ensure that you have your personal property assets well managed, reported, and documented accurately.
Obsolescence is one of the biggest factors that can affect your business personal property. It includes all forms of depreciation which are the normal wear and tear, the effect of conditions outside of the said property, and loss of functional utility. Moreover, the last two forms mentioned can be leveraged. This is to take control of the assessment of your business personal property.
When it comes to real estate assessments, they tend to depend on the analysis of comparable rentals and sales in order to calculate or estimate the market value of the building or land. On the other hand, under business personal property, the assessment depends on a public depreciation schedule. This document will present the item’s wear and tear from the date of purchase or acquisition through the filing date.
Most taxpayers are not aware that they have a legal right to give additional depreciation. This could lead to a decrease in their annual tax liability. Furthermore, it would help if you keep in mind that you should make sure you are set to claim and document additional obsolescence of your business personal property to your benefit when it comes to preparing your annual business personal property compliance return.
Personal Property and Business Loans
You can use your business personal property to act as a security for your business loan. If you do so, the lender has the right to repossess the said property if you fail to pay back the loan in full. On the bright side, pledging your property as collateral can raise your chances of having favorable loan terms and interest rates. This is because this will make it less risky from a lender’s point of view.
One good example is taking out a loan to buy a car for business purposes. The loan is considered a business loan and not a personal loan. Furthermore, the interest rate on the loan will be considered deductible as a business expense.
It is vital to know that not all lenders accept the personal property as collateral. This can only be done on a case-to-case basis. This is because personal property is movable and tends to depreciate over time, unlike real property that stays still and can be challenging to move.
Business Personal Property Records Safekeeping
It would be best to keep your business personal property records. This should start from the time you purchased the item for business use. Also, it would help if you list down on the record the purchase price and any depreciation on the said property. This is because your records might come in handy over time, especially when you want to back up any tax deductions.
An individual or a business entity can acquire personal property. However, the one acquired by the former is slightly different from the latter. Moreover, this type of property can be taxable. That is why it is vital to correctly manage your personal property (either as an individual or a business entity) to avoid any future financial problems.
Lauren Cordell writes on various financial and business websites. Most of her writings focus on helping small business owners and entrepreneurs manage their finances effectively. She tackles topics on accounting, insurance, taxes, economics, and anything that will educate the business-minded ones.