State and Local Taxes: Ad Valorem Taxes

Kim Tarnakow, CPA

May 7, 2020

Ad valorem (personal property) taxes are levied by the jurisdiction for the right to use property within the jurisdiction.  There are several key terms related to ad valorem taxes:

Lien date – The date that the location of the property is determined for ad valorem tax purposes.

Report Due Date - The date the ad valorem return is due at the assessor’s office.

Payment Due Date – The date the tax becomes due.

Most personal tangible property items may be subject to ad valorem tax, however, there are differences between states.  The lien date for many states is 12/31, while in Alabama its 10/1.  The report due date for the majority of states is between 2/15 – 4/15; however, the Alabama report due date is 12/31.  Other differences include the taxability of specific items, such as inventory, software, supplies and work-in-process.  States also vary in the special exemptions available.  As a general rule, if a company has personal property in a state on the lien date, there may be an ad valorem reporting requirement.

The Mechanics of the Ad Valorem Process
Once it is determined that a business has an ad valorem return filing requirement, the personal property should be categorized by class, based on the classification categories for the state in which the property is located and by year.  For example, there may be a category for furniture and fixtures, and another for equipment.  When the property has all been placed in the correct categories, the base for the tax is the original cost, multiplied by an assessment percentage.  Alabama uses composite tables in determining the assessment value of the property.  The cost of the property is multiplied by the composite rate based on the class and year of purchase.  It should be noted that in most states, the property assessment value will never reach zero, no matter how long something is owned. 

Things to Consider During Ad Valorem Return Preparation

  • Update the personal property listing – Review the personal property listing annually to ensure that all new assets are included and that all assets that been disposed are removed.  Remember, you will only stop paying ad valorem taxes on property once it is GONE.
  • Update locations of personal property – If the business has property in multiple states, determine the location of each asset based on the lien date.
  • Lien and reporting due dates – Determine the lien date as well as the reporting due date for each state in which the business has property.
  • Review the Small Tools and Equipment Account – With the change in the tangible property regulations several years ago, many businesses expense smaller purchases pursuant to the company capitalization policy.  The cost of the small tools and equipment is being expensed directly on the P&L and the assets are not reflected on the fixed asset schedule.  While this treatment is correct for income tax purposes, the small tool and equipment purchases may still be subject to ad valorem taxes.
  • Asset classes – Review the asset classifications for each state in which the company is doing business.  Since the asset classes have different residual lives, this can impact the amount of ad valorem taxes being paid.

If you have questions regarding ad valorem reporting rules and your company, please contact Kim Tarnakow at ktarnakow@ttpcpa.com or at (205)733-8265.

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