Reducing Personal Property Tax Liability by Making “Ghost” Assets Disappear
Reducing Personal Property Tax Liability by Making “Ghost” Assets Disappear
A few months ago, Altus Group was contacted by one of our clients, a large nationwide retailer. They felt they could reduce the high personal property tax liability at one of their 500 stores, and needed our advice.
The retailer had $3 million in assets listed on their tax return, but when we visited the store, we found significantly less property onsite than what was reported; in fact, it would have been difficult to fit that much property inside the 100,000-square-foot site. We also discovered that the retailer had similarly high tax liabilities at most of their other stores.
The source of the problem was not difficult to find. For many large retailers, high personal property tax liabilities start at the central purchasing department, which orders thousands of assets at a time. Once the assets are acquired, the Accounting Department creates journal entries to allocate the assets to their correct location code in the fixed asset detail based on where the property was shipped. Unfortunately, this is often where the process prematurely ends. Instead, once assigned to a location within the fixed asset listing, the Accounting Department should determine whether the newly acquired property replaced an existing asset for each location, and if so, determine the correct disposal amount to recognize. But because the process of identifying the correct retirement amount is time consuming and complex, this last step is often overlooked, sometimes for years, or even decades. As new asset acquisitions continue to be “stacked” on top of the unrecorded disposals — the personal property liabilities grow unnecessarily as the company pays tax on both the new property added and the old property that wasn’t properly disposed.
Fortunately, Altus has developed an innovative solution that will ensure our clients have accurate, clean, fixed asset listings that reflect the property actually at each location.
Why the Calculation of Disposals is So Important
In today’s competitive retail environment, companies are remodeling stores at an accelerated rate in an effort to keep them fresh & exciting to customers and gain market share. These “refresh” cycles typically change out retail equipment across several departments, or sometimes even the entire store at once. With such a significant portion of the assets being changed out during a remodel, combined with the work required to correctly capitalize and allocate each new asset within the fixed asset listing, companies often overlook performing a disposal review at the conclusion of a remodel project. Because of this, many companies have years of built-up costs from prior remodels across numerous locations, where disposals were not adequately taken.
When companies file personal property tax returns, each reporting jurisdiction typically requests a listing of all active property at each location. As such, when companies don’t get the asset/disposal calculation right, or don’t remove the replaced assets from the fixed asset listing in a timely manner, the business impacts can be enormous. This is because the fixed asset listing is the only proof taxing jurisdictions have as to what is at the location as of the lien date.
To make matters worse, taxing jurisdictions never fully depreciate an asset – rather depreciating down to a “floor value” which is typically 10-20% of the original cost. So an asset will continue to generate tax liability, until it is removed from the fixed asset listing – regardless of its age, or even existence.
Whether or not the assets being reported are actually on site, companies are taxed on them in perpetuity or until the books are cleaned up to reflect disposals taken over time. Because many companies operate hundreds of locations and don’t have the manpower for the task, the books are never adjusted.
The First Step in Tackling the PPT Problem
The traditional accounting approach to prove the existence of unrecorded disposals has not changed in decades. It involves identifying what asset replaced what, and then removing the old assets from the fixed asset listing. It’s a complicated, tedious, manual process that companies often didn’t have enough personnel to take on.
A few years back, Altus Group built a model based in Microsoft Excel that streamlined parts of the process. The model, designed to take some of the manual review out of the process, featured various pivot tables running concurrent formulas. . It provided a platform to not only make year-over-year reporting easier, but allowed us to quantify the “catch-up” disposals for companies who wanted to recognize them using reverse-trending. The Excel-based model improved client processes and, hence, results by taking hours off the original, manual process, and allowed for disposal projects to offer a better value proposition to the companies taking them on. Unfortunately, it also resulted in frequent file crashes.
We knew we could do better.
There Is a Better Way
It’s our proprietary software solution and it combines multiple methodologies for ghost asset identification into one exciting software package. It takes the original Excel based model to the next level, performing similar calculations significantly faster, in a more controlled environment, and with both greater security and efficiency, especially when importing large amounts of data.
In addition to utilizing reverse trending to calculate disposal amounts, the software can also calculate the assessed value for the remaining property once disposals have been removed. The value and disposal calculations can be exported to Excel and used to update personal property reporting software for the correct reporting cost, or used on its own as support for current year, or amended returns.
Beyond calculating disposals based on additions, the software also allows companies to calculate disposals based on modeling, a technique in which new store locations are analyzed to develop a model for the costs that should be included in each taxable category. The software compares the older locations to the model and identifies disposals when a category falls outside a specified threshold. This is especially helpful for companies that have been inconsistent in disposal reporting and want to clean up fixed asset listings where physical inventories are cost prohibitive.
The Bottom Line
Altus now has the power to provide more robust property tax services than ever before. Our software allows Altus tax professionals to run multiple analyses to ensure every one of our clients is paying property tax based only on the assets actually at each location in their portfolio. Whether working with clients to clean up their asset listings for compliance reporting, or running modeling scenarios to help tell the story for a valuation appeal – we can always turn to this new tool to find the right solution. And while our Excel spreadsheet cut the hours spent in half, the implementation of the software brought it down an additional 90%.
So when Altus visited that retail store earlier this year, which had claimed $3 million in assets, we found that it had layered acquisitions year over year and its tax liability had been artificially inflated since the locations very first remodel. But using our tool, we were able to remove the ghost assets from their asset listing, and provide the client with an updated assessment and tax projection well before the filing deadline. This process ensured tax savings not only for the current year, but for each future year the new detail is used as the basis for filing. Additionally, Altus was able to use the software to update prior year returns – generating even more savings from amended returns. And this wasn’t just the case for a single location. Once loaded into the software, Altus was able to identify several additional locations where ghost assets existed, and were able to quickly and decisively act on those opportunities – securing tax savings for the company beyond original expectations.
Altus Group’s Adoption of Technology in Tax
Altus Group is at the leading edge of applying technology solutions to tax consulting. Our expertise in retail valuation provides us with critical insights into the issues facing many large national retailers. We took what we knew about the industry, the changing environment, and how books and records were traditionally kept and developed our software solution to improve our clients’ results. And we’re not finished: the software development team at the Altus Group is now working to create custom reports and templates that will summarize the results of various analyses in an easy-to-understand format that can be sent to a tax assessor or other interested party.
When it comes to building technology that can simplify and streamline commercial property taxes, some of the best ideas are coming from the Altus Group.