By Patrick O’Connor
Since 1981, the Texas Property Tax Code has required owners of business personal property (BPP) to file an annual rendition. However, until 2003 when the Texas Legislature revised the law, there were no penalties for not filing a rendition for BPP. Consequently, most owners of business personal property did not file annual renditions. Since the law was revised, in addition to the annual tax, owners of BPP must pay a 10% penalty if they do not file an annual rendition. In addition, the burden of proof at the ARB hearing also changes from the appraisal district to the property owner if the property owner does not render.
Are there criminal penalties for not rendering?
There are criminal penalties for knowingly filing a fraudulent rendition. There are no criminal penalties for not filing a rendition.
Who must file a BPP rendition?
Anyone who owns tangible personal property used for the production of income is required to render annually. Renditions must be filed by April 1 for personal property owned on January 1.
Is it difficult to file a BPP rendition?
Completing the forms for a BPP rendition is not a difficult task. The portion that may be difficult is deciding whether to render and determining the market value of your property.
Owners of BPP with a market value of less than $20,000 can file a rendition by simply reporting the name and address of the property owner, a general description of the property by type or category, and the physical location of the property. Owners of BPP may also provide an opinion of market value. A copy of the Comptroller’s rendition form for BPP can be obtained at cutmytaxes.com.
Owners of BPP with a market value of greater than $20,000 must file a rendition including the name and address of the property owner, a description of the property by type or category, information on inventory, the location of the property and either: the property owners good faith estimate of market value of the property or, at the option of the property owner, the historical cost when new and the year of acquisition of the property (Texas Property Tax Code 22.01). Accountants, tax consultants and appraisal district staff refer to “the historical cost when new and the year of acquisition of the property” as the fixed asset listing.
Market value of Business Personal Property
The Texas Property Tax Code defines market value as the price at which a property would transfer for cash or its equivalent under prevailing market conditions if:
- Exposed for sale in the open market with a reasonable time for the seller to find a purchaser;
- Both the seller and the purchaser know of all the uses and purposes to which the property is adapted, and for which it is capable of being used and of the enforceable restrictions on its use;
- Both the seller and purchaser seek to maximize their gains, and neither is in a position to take advantage of the exigencies of the other.
Market value can also be described as: “the amount you could sell the property for,” and “value in exchange.” Appraisal districts typically use depreciation schedules to calculate market value of BPP. This approach generally overstates the value. For example, the schedule used by appraisal districts to value a desk chair that costs $100 would indicate a value of $90 for the chair after one year.
The following are the estimated values for common BPP based on the comptroller’s schedule:
- For a motel owner, one-year-old motel sheets, towels and TVs, are estimated to be valued at 90% of the cost new based on an eight-year schedule.
- A three-year schedule is used for computers, thus indicating a two-year-old computer could be sold for a third of its cost new.
- One-year-old heavy equipment is valued at 90% of its cost new based on a 10-year schedule. O’Connor believes this valuation scheme grossly over-values BPP.
How to develop a good faith opinion of market value for BPP
There are a variety of sources for generating an opinion of value for BPP which include:
- Hiring an appraiser
- Calling used equipment dealers
- Researching on the Internet
- Purchasing manuals that detail used equipment prices
- Calling friendly competitors
- Using common sense.
Should I provide a good faith opinion of market value or a fixed asset listing?
Most property owners will fare better by providing an opinion of market value instead of a fixed asset listing. If you send the appraisal district a fixed asset listing, they will use the Comptroller’s valuation schedule to calculate the market value of the various items. This will frequently indicate a value two to three times higher than the actual market value of the property. In our opinion, it is best not to provide a fixed asset listing.
There is some discount from your cost basis that is appropriate when valuing inventory. Factors that should be considered include:
- Intangible personal property
- Functional obsolescence
- Physical damage
- Economic obsolescence
- Both common sense and valuation experts are helpful when determining a discount from cost for inventory
Clothing and computers are two examples of inventory that can be worth less than its cost basis. Let’s assume the recent fad for women’s clothing was electric blue shirts. However, six months have passed, and there is virtually no demand for electric blue shirts.
The rapid pace of technological change means computers that were cutting edge six months ago may be old news today. While it may be difficult to value both the electric blue shirts and the six-month-old computers, reasonable people would agree their market value is less than their cost basis six months ago.
Should you render?
Assume the following example:
You own a small manufacturing company. Your assessed value for BPP has been approximately $100,000 for the past five years. The lowest possible number you could render is $1 million. If you don’t render, your annual BPP property taxes are $3,300 ($100,000 times 3%; plus a 10% penalty for not rendering). If you do render, your initial BPP assessed value will likely be $1 million. You can appeal using unequal appraisal, a relatively new approach. Further, if you render this year for $1 million, it is likely the appraisal district will set your initial assessed value in future years at $1 million or higher. Based upon an assessed value for your BPP of $1 million, your BPP taxes would be $30,000 ($1 million times 3%).
Consider another example:
You operate a one-person consulting firm. Your BPP includes a 10-year-old desk, two five-year-old-file cabinets, a two-year-old computer and a four-year-old printer. The total market value of these assets is perhaps $1,000. Your assessed value last year was $1,000. If you render, you follow the law and avoid the 10% penalty ($3 based on 10% of $30).
Clients often struggle when trying to decide whether or not to render. In practice, a number of property owners choose not to render either because rendering would sharply increase their property taxes or because the penalty for not rendering seems insignificant compared to the hassle of rendering.
- The law in Texas states that owners of business personal property (BPP) used for the production of income must render.
- The penalties for not rendering include paying a 10% penalty, and the burden of proof shifts from the appraisal district to the owner at the Appraisal Review Board (ARB) hearing.
- The process of completing rendition forms is fairly simple, when market value is estimated.
- Decisions about whether to render and calculating market value can be complicated.
- Most owners will fare better by providing an opinion of market value on their rendition rather than providing a fixed asset listing.
Simple – we literally wrote the book on business personal property rendition, valuation, and appeals.