Paying and Deducting Business Property Taxes: What You Need to Know

Jacob Maslow  |

Businesses, just like individuals, are required to pay property taxes if they own real property. In the same way as residential property, these taxes are based on the assessed value of the real estate, including land and buildings.

Many new business owners overlook the fact that they have to pay property taxes and may not take them into account when creating their budgets, which can create a cash flow issue. Here’s what you need to know about business property tax.

How Business Property Taxes Work

Property tax is considered an “ad valorem” tax because it is calculated based on the value of the property. The value of the property for tax purposes is not the same as fair market value.

The value is determined by the property assessor and is based on the calculated value.

Property taxes can be affected by many things.

“Reassessment, renovation, conversion, demolition or transfer could make your property tax bill unpredictable,” says the Law Offices of Gary H. Smith.

For example, if the business’ real estate is sold, the tax for the year will be distributed between the previous and new owners based on how much of the year each party owned the property.

A business' property taxes are assessed by local entities (e.g. cities, towns, villages, counties, etc.) for local purposes, such as maintaining schools and roads.

When a business purchases real estate, the property will be registered with the local tax authority. The owner will receive information on the changes to the assessed value and the amount of taxes owed each year.

The tax bill you receive will be based on that assessment, and you have the right to contest the assessment.

Each year, local governments ask commercial property owners to fill out and return an income and expense form. That form is given to the board of assessors and is used to determine the value of the property.

They determine this value based on a number of factors, including:

  • Rental income
  • Expenses, including insurance, advertising fees, repairs, management fees, etc.

Typically, assessors use a relevant cap rate to determine the property’s initial value, but the calculation of the property value is a bit more complex.

Deducting Property Taxes

The IRS does allow you to deduct business property taxes, but there are restrictions and limitations on which portion can be written off as a business expense.

It’s important to read the IRS’s rules on property tax deductions carefully.

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