* Real Estate Taxes
* Business Property Tax
* State Franchise Tax
* State Licenses or Fees
* Unique Production or Consumption Taxes
These taxes are not expensive in comparison to income taxes. They are customarily handled by the bookkeeper. Each section below explains the tax or fee; how it is recorded for accounting purposes and documented.
Real Estate Taxes
After income taxes, real estate taxes are the biggest tax expense for small business. Many small businesses own the real estate or commercial property where the operation is located. Even without owning the real estate, most lease agreements for small business require the business to pay the real estate tax as a function of rent. Local county governments access and collect this tax either quarterly or on a semi-annual basis.
When paid, the tax is accrued as a prepaid expense and amortized out equally for each month based on the county’s assessment period. Whether the business owns the building or leases the property, the amortized debit is posted to a child account under a parent account named ‘Facilities’. Facilities is structured as follows:
Facilities: (In Detail)
– CAM Fees
– Real Estate Taxes
– Maintenance and Cleaning Office Operations
Taxes and Licenses
Some accountants post the real estate taxes to taxes and licenses. The method above is more informative and practical in its use and understanding.
Business Property Tax
Business property includes all fixed non real estate assets owned by the company. Basically, it is everything on the depreciation schedule except for real estate and amortizable assets. It is commonly a local tax. Some states exclude vehicles from the definition as transportation and equipment is taxed separately.
Most tax formulas are a rate per $100 of value each year. Some formulas use a depreciated value under straight-line depreciation while others simply set the value at a quarter of original cost. The report and tax are an annual filing and payment requirement. If the total amount paid is more than $250, I encourage the bookkeeper to book the payment as a prepaid expense and amortize the tax monthly in a similar manner as revenue taxes.
As for reporting purposes, the most common method is to identify the cost basis of assets based on prior years. The sum total should equal the depreciation basis of fixed assets excluding real estate and transportation. Real estate and transportation is taxed separately.
Here is an example of one of the reports I have filed:
Business Property Report – 2016
2016 – New Acquisitions $ZZ,ZZZ
2011 and Prior Years ZZZ,ZZZ
Total Cost Basis $ZZZ,ZZZ
28% Valuation Factor ZZ,ZZZ
Number of $100 Units Rounded Up ZZZ
Tax Rate per $100 $4.27
Tax Owed $Z,ZZZ
Some communities may split out certain asset groups for a separate tax rate. I’ve seen technology separated out along with farming equipment. The key to a good report is to tie the respective results to the depreciation schedule and in total.
One last quirky detail, each state will define fixed assets differently. For IRS purposes a fixed asset is defined as
1) tangible in nature;
2) a life expectancy beyond one year; and
3) is non consumable.
In addition the IRS is OK with using a minimum threshold of value depending on your business to record a purchase as an asset. A value of $300 or more is reasonable to record the purchase as an asset contingent on the asset meeting all three parts of the definition. However, local governments consider a $14 stapler a fixed asset for tax purposes. The IRS considers this an office expense. If your local government auditor goes to this extreme, simply include a couple of hundred dollars for each year as basis in the report for ‘Office Tooling’ and this will address this discrepancy. The same principle is used for tools and auxiliary equipment that is customarily expensed to the income statement.
State Franchise Tax
Many states have an annual franchise tax or renewal charge. It is typically a flat rate from $100 to $500 depending on form of entity status. The most common dollar value I’ve witnessed is $250. When paid, the debit is to taxes and licenses with the offsetting credit to cash.
Other states use a traditional renewal fee based on the corporate structure. It is paid at the same time the company files an annual report with the secretary of the state or the state’s corporation commission. Just like the state franchise tax (fee), it is posted to taxes and licenses.
Production and Consumption Taxes (Fees)
There are tens of these types of taxes or fees and are often industry specific. They include:
* Recycling Tax
* Tire Scrap Fee (Tire Service Centers)
* Waste Oil Disposal Fee
* Oil Production (Extraction) Fee,
* Coal Severance Revenue Charge
* Fairs and Festivals Levy
Production and consumption taxes are customarily tied to either volume or utility (usage) and are not a flat one price fee. Most are paid on an annual basis or via quarterly installments. They often require a report (return) of some sort to be filed with the payment.
Unlike production and consumption taxes which are utility or volume based, most assessments are flat rates for a time period. They are usually mandated by some governmental authority such as regional systems, city departments or state commissions. Similar to other types of taxes, the dollar amount is debited to the expense account of taxes and licenses.
In general there are two different accounting methods used to process taxes. The first is the traditional debit to the proper expense account (usually taxes and licenses) with the offsetting credit to cash or payables. This is recommended for:
2) Production and Consumption Taxes (Fees)
3) State Licenses
4) State Franchise Taxes
In most cases the dollar amount is less than $250 for any single item. However, if the dollar amount exceeds $250, it is best to use the accrual/amortization method.
The accrual/amortization method requires the dollar value of the tax to be posted to prepaid expenses and then amortized in equal monthly amounts over the period of time the tax applies. The amortization entry is a debit to the appropriate expense account and a credit to the prepaid expense account.
As always, I advocate proper documentation to ensure information retrieval and record retention. Every record should be scanned once the item has been approved for payment. Scan the document to the taxes or licenses folder for the respective year in the accounting directory. In addition, the check for the item is also scanned to the same folder once it is signed. Finally, make sure the respective cash disbursements run is scanned to the folder for that month under disbursements as explained in the Cash Disbursements – Lesson 45
The paper document is filed in the accounts payable folder under the particular governmental authority name.
It is business nature to dislike and have angst about these various taxes and fees. Many owners hate it so much they often refuse to pay or neglect executing payment. Unlike the private business world, the different governmental authorities are punitive with late charges and penalties, not to mention the additional interest charged. In addition the government has a built-in process to transfer the case to court. Nothing is more embarrassing than having the sheriff serve the company with a comply notice or request to show up in court.
The time to disagree or argue with the government over the amounts due is through their grievance and public input process. This takes time. In the interim the amount owed is due and should be paid immediately. As explained in cash disbursements, I often run a separate check just to make sure it is addressed immediately.
Summary – Other Taxes
Other taxes include real estate, business property, franchise, licenses and fees. Those taxes less than $250 should be immediately expensed to the appropriate account. Others are posted to prepaid expenses and amortized over the time period for the respective tax. ACT ON KNOWLEDGE.