Magazine article The National Public Accountant

Valuation of Intangible Assets for Property Tax Purposes

Magazine article The National Public Accountant

Valuation of Intangible Assets for Property Tax Purposes

Article excerpt

Accountants are often involved in analyzing, negotiating, contesting and litigating taxpayer's ad valorem property tax assessments. Accountants are also involved in selecting and working with appraisers who will value their clients' or their employer's property for ad valorem property tax purposes. While most accountants who practice in this area are generally familiar with the valuation of taxpayers real and personal property, they may not be familiar with methods to value taxpayer's intangible assets for property tax purposes.

The unitary method of ad valorem property tax assessment has historically been used for taxpayers who operate in regulated industries or across numerous taxing jurisdictions (and with assets that function integrally as part of a multi-jurisdictional "unit"). In recent years, assessing authorities have been attempting to use the unitary method to assess various non-regulated but real-estate-dependent businesses.

In the unitary method, the total value of the taxpayer's business enterprise (i.e., total outstanding debt capital plus total outstanding equity capital) is estimated. The taxpayer's total business enterprise value, then, becomes the indicated value of the subject "unit." Adjustments--typically deductions--are then made to the indicated value of the unit in order to estimate the value of the taxpayer's assets subject to property taxation. These deductions from the unit value typically fall into two categories: (1) assets that are individually assessed separate from the unit (e.g., trucks and automobiles, in many jurisdictions) and (2) assets that are statutorily exempt from ad valorem taxation (e.g., intangible personal property assets, in most jurisdictions).

The alternative to the unitary method (and the most common method for property tax assessment) is the summation method. In the summation method, the statutorily required values (e.g., fair market value, market value, true cash value, etc.) for each of the taxpayer's assessable assets are separately identified and quantified. Each of the individual assessable asset values is summed (hence, the "summation" method) to estimate the total value of the taxpayer's assets subject to property taxation.

Unlike in the unitary method, few adjustments--or deductions--need to be made to the preliminary results of the summation method. This is because assets that are assessed separately or that are exempt from property taxation are never encompassed in the valuation analysis. Therefore these assets are not included in (and do not need to be deducted from) the summation.

In theory, the unitary method and the summation method should both reach the same conclusion: the value of the taxpayer's assets that are subject to property taxation. In practice, the two methods often reach materially different preliminary conclusions for the same taxpayer. The most common reason for the differing conclusions is the naive application of the unitary method. In the typical naive application, the taxpayer's total business enterprise unit value may be properly estimated but the non-taxable (often intangible) assets are not identified, valued and deleted from the overall unit value. In other words, this overall unit value includes the value of assets not appropriately assessable for property tax purposes.

Role of Valuation in the Property Tax Assessment Process

State and local property taxes are levied as a percentage of the total assessed value of the property being taxed. According to state and local laws, tangible personal property, tangible real property and sometimes intangible real property are subject to taxation. The real and personal properties of virtually all industrial and commercial firms are subject to ad valorem taxation. The amount of tax expense that a taxpayer pays is a function of the locally determined milage rate times the property's assessed valuation. The subject property's assessed valuation is typically a statutorily determined percentage of the property's fair market value. …

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