Fortunately, you have options for relief
By Josh Malancuk, CPA, CMI, JM Tax Advocates
The Hoosier state’s 30% depreciation floor on business property tax is the highest in the nation.
You can still amend your personal tax return within a year of filing the original.
Implementing an effective review process can help your business stop the bleeding of overpaid taxes.
It is worth challenging your assessment; just don’t try to do it yourself.
Many consider Indiana a wonderful place to live, work and raise a family. But its hardworking manufacturers pay some of the highest property taxes in the nation, especially on their equipment.
Essentially, there are two calculations used to determine the assessment (“True Tax Value or TTV” is Indiana’s assessment term) for your business personal property taxes: 1) 30% of original cost. 2) 7-year schedule based on a sliding scale. The sliding scale depends on which of the four “pools” your business falls into, but for many of you who have assets with a five- to eight-year life (see Pool 2 below), the depreciation schedule starts at 40% of reportable cost in the first year the equipment is placed in service, rises to 56% in Year-2, and then declines steadily from 42% in Year-3, to 32% in Year 4, to 24% in Year 5 to 18% in Year-6 and to 15% in Year 7. While in many other states the latter years decline to 10%. But that’s not the big issue. The big issue is that Indiana always uses the HIGHER of the two methods to compute TTV: 1) 30% of reportable cost or 2) the pooling, sliding scale method. So even after your total equipment has been in service for a while (i.e., falling below the 30% threshold with the pooling method), you still get assessed at a minimum 30% of total reported cost for TTV. As shown in the example of a midsize Indiana automotive-related manufacturer we work with, that’s a huge difference—and not in your favor.
REAL WORLD EXAMPLE This automotive company purchased equipment with a seven-year life about a decade ago for $29,806,867. Under the pooling method, equipment with a seven-year tax life would receive 85% depreciation (15% true tax value). So, their TTV would be $4,959,132 by Year 7 and beyond.
Source: JM Tax Advocates, 2023
However, there is a second part to the return (see below) that compares the total reportable cost at 30% with the pooling method value to arrive at TTV. Unfortunately, for Indiana TTV, you are always assessed at the HIGHER of the two methods. In this case the pool answer of $4.959 million is less than 30% of cost or $8.911 million. That means our client is at the 30% floor. In other words, all of their assets are being assessed at the same 30% of cost formula for TTV regardless of whether those assets are new or old.
Source: JM Tax Advocates, 2023
Assuming a 3% tax rate on personal property, the company’s tax bill on their personal property ends up being a whopping $269,450 (per 30% of cost method) instead of $150,879 (per pooling method) for this example year.
That’s a killer for an established business that’s been around in the state of Indiana regardless of what their property is really worth. Eliminating or reducing the depreciation floor would free up capital for this company in the neighborhood of $118,000. The resulting savings would enable it to invest elsewhere and create more jobs. Many Indiana manufacturers are unfortunately in the same position.
That being said, Indiana lawmakers are aware of this inequity and are trying to enact a change. For instance, Rep. Peggy Mayfield, R-Martinsville, is filing legislation that would raise the exemption that determines which companies must pay the business personal property tax. Her bill would exempt all companies that own machinery, equipment and other tangible goods that cost them, in total, less than $250,000. The current threshold is $80,000. Other efforts have proposed lowering the depreciation floor to say 25%, but political action committees have come out of the woodwork to squash it. And assessors want to keep their stable sources of revenue intact and don’t want to deal with issues like capping their funding. That’s why we’re stuck.
Local government leaders harshly opposed the proposed cut that would have slashed local revenues by $100 million statewide by the year 2037, according to a fiscal impact study by the Legislative Services Agency. A study by Indianapolis-based economic research firm Policy Analytics also found that eliminating the depreciation floor would have resulted in residential homeowners paying a larger share of the overall tax burden. And who do you think votes on our elected officials: homeowners or companies? Something that doesn’t get as much media coverage in our state is the fact that there’s also a cap on the tax rate itself. For normal commercial and industrial property owners it’s 3% of the total value of the property, including real estate and personal property), unless there’s a referendum to increase the rate above 3%. Assessors are capped at 3% of their overall assessment base. They can end up having funding shortfalls if the assessment base overall dips below what they expect. For instance, if the 30% floor change got lowered even slightly to say, 25%, there would be no way for assessors to backfill that revenue, barring an approved referendum via special public vote, if there’s a rate cap issue.
That’s why we’re in this stalemate that ultimately won’t make our state more competitive for attracting and keeping businesses. By comparison homeowners are capped at a 1% tax rate unless there’s a referendum, and apartment owners and senior care facilities are capped at a 2% tax rate. Manufacturers and other commercial enterprises take it on the chin with the largest tax rate cap of 3%. While other states impose floors on individual taxable assets, none are as high as Indiana’s 30%. In fact, 12 states do not tax business personal property at all, including Indiana’s manufacturing-intensive neighbors, Illinois, Ohio, Minnesota, and Iowa. Michigan has moved to an essential services assessment (ESA) for companies whose primary business is manufacturing and therefore, has dramatically lessened its reliance on funding from manufacturing equipment. Kentucky also allows a drastically lower tax rate on manufacturing equipment by exempting the equipment from local levy rates. It’s no secret that Indiana has a hard time competing with non-personal property tax states that don’t tax equipment, if at all. It also has a hard time competing with states that offer more favorable tax rates on manufacturing equipment as a whole. WHAT CAN BUSINESS OWNERS DO?
As a starting point, we recommend that business owners and, ideally with a seasoned navigator, collaborate on reviewing historical personal property tax return filings and workpapers to uncover potential mistakes that are causing the company to overpay its property taxes. There are a number of areas to explore that may involve time intensive diligence such as digging into fixed asset invoices, interpreting environmental permits and related projects, taking an equipment inventory, etc. Asking the following three questions for each furniture, fixture, and equipment capital item usually uncovers most return mistakes:
1. Is it there?
2. Is it taxable?
3. Is there a better classification?
Once you have a verified equipment list, you can amend your personal tax return within a year of filing the original. However, it’s advantageous to amend prior to November 15 of the filing year to avoid a 10% haircut in benefit that is deducted from the tax credit or refund as a result of missing the filing date.
May 15 ends up being the same deadline for your current year filing and the latest filing date of your prior year amendment. That’s important because if you get involved and review your personal property, you can fix the prior year value and also implement those same changes into the current year filing if you do it all by May 15, leading to twice the benefit.
WORKING THE PROCESS TO YOUR COMPANY'S ADVANTAGE
Based upon your rising property tax bill, you may sense that your personal property taxes are too high but aren’t sure how your business is being over-assessed or in what areas. With so many moving parts involved, how do you determine your correct personal property tax value?
Since most companies don’t have the resources to answer these questions in-house, and don’t have enough time to put together a full-scale personal property review work plan that challenges the status quo reporting, the cycle of error and overpayment continues for years. That’s what assessors count on! But you owe it to your company to ensure that you don’t keep overpaying your taxes year after year.
To evaluate and manage your personal property tax assessment levels correctly, use a seasoned navigator who is familiar with your business personal property and brings significant experience through a proven audit process. He or she can identify, and document amended return positions and then help your company stop the bleeding by fixing many of the issues permanently through bettering your ongoing personal property tax return filings. Sure, you can try to do the same kind of study yourself, but you’ll likely leave tax savings opportunities on the table and continue to overpay.
In case you are curious, here's what an ideal Indiana personal property review work plan looks like:
1. Review and evaluate personal property return data – 2nd Qtr. Of filing year
2. Validate revised positions and finalize amended return – 3rd Qtr. Of filing year
3. If needed, file local appeals – TBD, typically 4th Qtr. Of filing year
4. If needed, file state appeals – TBD, typically 4th Qtr. Of filing year
As mentioned earlier in this article, there are key deadlines to meet in order to achieve maximum benefit during a personal property tax review. Scheduling and planning become increasingly complicated as your appeal is elevated to state or tax court levels where rules of discovery typically apply. For these reasons, we recommend bringing in the experience!
DON'T BE A DO-IT-YOURSELFER
It’s always worth it to evaluate your business property assessment; just don’t try to do it yourself. If your property is undervalued, assessors can actually increase your value during their audits. When returns are amended, assessors can review and make their own determinations. If they discover they’ve mistakenly assessed the property under what they should have, they can change the value on the spot.
CONCLUSION Indiana remains a great business friendly state. It’s cost of living is much lower than comparable states and housing is very affordable. Utility rates are lower than in many other states. Labor rates are much lower than many other states and there is a large in-state population of highly skilled labor and Indiana is home to several world-class universities. We’d just like it to see our manufacturers – a significant generator of in-state jobs -- not so unfairly taxed.
When it comes to business personal property taxes, the rules are complex, the timing is critical and the downside to an erroneous appeal can be significant. Don’t be a do-it-yourselfer here. Enlist a pro who understands your business operation and how it correlates to your business personal property. Your company’s pocketbook will thank you in the end! _____________________________________
Josh Malancuk, CPA, CMI is President of JM Tax Advocates, a service organization who advocates for property tax reductions and maximum level incentives for leading U.S. manufacturers and commercial property owners. He brings 28 years of specialized knowledge and experience to his clients. Josh can be contacted directly at email@example.com or at 317.674.8390 x100.