For California leasing companies - When is inventory assessable?

How an inventory review can impact personal property taxes

During the past year as businesses tightened their belts and reduced spending, those with proactive property tax management understood how to reduce tax liabilities. Reducing property taxes allows a business to not only save in the current year, but possibly to continue accumulating those savings in future years as well.

One specific area for tax reduction is “Business Inventory.” The State of California exempts inventory from assessment, so at first glance, it appears to be a simple tax issue.

However, when the business in question is a leasing company or an equipment rental company, the issues are more difficult to understand.

Lining up the tax lien date with the lease start date

Under California Revenue and Taxation Code §129, leased assets are considered part of inventory, and therefore, assets held for lease on the lien date are considered exempt under the law. However, assets that are under lease on the lien date are assessable.

The state requires both the lessor and the lessee to report leased assets. The Business Property Statement (Form 571-L) asks the preparer of the return who has the tax obligation for the leased assets being reported on the 571-L.

If the Assessor does not have an indicator as to who has the liability, sometimes bills will be issued to both parties, resulting in a double taxation.

While this is good for the county, the error is difficult to find by the taxpayer. It takes a person who is knowledgeable with how each county assesses properties to discover this type of error, which is generally hidden in the total assessed value.

If the error is caught in a timely manner, a conversation with the Assessor’s Office may produce a correction. However, it is more likely that an assessment appeal will need to be filed to protect the taxpayer’s rights until the issue is addressed by the Assessor’s Office.

Report 100% of the assets

Another error that often occurs on the Business Property Statement (571-L), which leads to a higher tax bill, is incorrectly reporting the leased assets as of the lien date. The lessor should be reporting 100% of the assets whether out on lease on the lien date or still on the premises.

An attachment should be included with the 571-L to indicate the portion of the asset or assets that would be considered business inventory. In addition, the taxpayer must have the documentation to substantiate the assets that were out on lease or still on the premises as of January 1st of each year.

In conclusion, counties have received substantial excess taxes due to incorrect reporting of leased assets. Therefore, it is advantageous for leasing companies with significant assets to accurately track their leases, and then utilize specialists to report the assets correctly on their Business Property Statement (571-L) every year.