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Tangible Personal Property Something to Get a Hold of Depreciation

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									Tangible Personal Property
    Something to Get a Hold of

    Patriot Properties, Inc.
     What usually happens:

The taxpayer’s reported cost and date of acquisition (often of groups of
asset types) is utilized as the basis.

The trending factor is applied to get an indicated Replacement Cost
New (RCN).

The depreciation is applied based on the economic life of the asset and
the date of acquisition to get the depreciated replacement cost new
(RCNLD).

Compare the return received this year to the reported assets from last
year.
                                   Some States:
•   (FL is typical)

•   Require an on site visit and a detailed listing of assets using replacement cost new from
    manuals disregarding the taxpayers cost (in most circumstances)
•
•   Tax inventory based on monthly averages/12
•
•   Have free trade zones (or similar), usually on Mexican and Canadian borders or near air,
    freight, or sea ports. These Do not tax inventory IF is is not present for longer than a
    prescribed time (30 days, 90 days)
•
•   In Tennessee the lessee is responsible for taxes
•
•   Boston tracks aircraft at the airport and prorates time the aircraft is in the Boston
    airspace to tax the airlines.
•
•   Do not tax personal property at all!
         What is Supposed to Happen:

•   Get a List of the Assets
•
•   The “appraiser should systematically inspect the property”(1)
•
•   List the “description, manufacturer, model, age and general condition” of each asset.(2)
•
•   “For leased equipment: (record) the name and address of the owner/lessor, a description
    of the equipment including name of manufacturer, date of manufacture, model number,
    serial number, list price, and original cost if available, [lease number, terms of the lease
    and whether it’s a capital lease (a purchase) or operating lease (rental agreement). If
    possible, a copy of the lease should be obtained] (3)
•
•   Each year, “perform a field review to verify the business exists” (4)
•
•   Compare the return for the current year to the previous year.
•
•   “For a new account, compare the tax return with other returns filed by similar
    business..” (5)
•   Determine the Replacement Cost
•
•   Trend Historical Costs
•   The replacement cost can be determined by applying the trending or index factor to the
    purchase price if the purchase price represented market value at the time and the item
    was purchased new. This approach is flawed if either of the above is not true. There is a
    perfectly valid way to get the replacement cost if the purchase price represents market
    value and the age of the assets is known even though the assets were not new at time of
    purchase. This will be explained in the “What Can Happen” Section. Efforts should be
    undertaken to ensure that the reported purchase price is representative of market value.
    (6)
•
•   Get Costs from Manuals
•   It is possible to get replacement costs for thousands of assets from a variety of manuals
    and services as well as catalogues and newsletters. There are millions of varieties of
    assets so this is not always going to provide a reliable source.
•
•   Get Costs From Comparable Sales
•   If there are sales of similar businesses or asset types, these can be used as the basis for
    replacement costs. While it may appear there are few comparable sales from which to
    get this information, there are in fact many sales to use since each acquisition cost that is
    reported is a sale from which important comparable information may be garnered.
•   Determine the Appreciation/Depreciation
•
•   Remaining economic life and effective age are a function of actual age and
    condition as well as the total economic life. So one must make a judgment of
    what the effective age or condition/actual age should be. Keep in mind, not all
    items depreciate. Paintings, antiques, collectables may get more valuable. It
    may be argued that this is not appreciation but replacement cost trending.
    Either way, suitable adjustments should be made for assets of this type.
•
•   Apply the “Untrended Depreciation Schedule” provided by the DOR or
    comparable schedule to the asset along with the condition/age or effective age
    judgment made above to get the depreciation percent.
•
•   “The Property Appraiser should make additional adjustments for unusual
    physical depreciation of property when justified. Some of the conditions for
    which adjustments may be necessary are: ..prolonged exposure to corrosive
    materials, poor maintenance, excessive use.. Such adjustments should be made
    on an individual basis and only after physical inspection of the equipment and
    examination of the maintenance records” (7)
•   Determine the Just Value
•
•   “..the property appraiser should consider for use at least one of the following approaches
    to value as may be appropriate for the property being valued.” (8)
•
•   Comparable Sales
•   This may be appropriate for a comparison of entire business sales or individual assets.
    The best sales are purchases of assets new because sales of used assets may have other
    factors involved in the sale such as the seller’s duress and related costs of removal and
    reinstallation. The costs reported in the similar tax returns are a good source but are
    really more tied to the Cost Approach since depreciation can vary and by using the
    trending schedules we can infer a RCN.
•
•   Cost Approach
•   Once a replacement cost has been determined from above, apply the depreciation
    determined from above to get an indicated value.
•
•   The Income Approach
•   This involves determining a gross income attributable to an asset and deducting relevant
    expenses to get an net income. This is then capitalized using a rate that considers the
    yield to the investor, recapture, interest on the investment, risk and other factors. This
    may be appropriate for leased assets where you have a known rent and lease term. It can
    be validated against known costs but if you have known costs, use them rather than the
    indication shown through the income approach.
• What Can Happen
•
•   There are lots of “shoulds” in the above. Of course one should systematically inspect the
    properties and should visit each account every year and should track assets individually
    and in great detail and examine the three approaches to value in deciding on the final
    value of each asset. But this is unrealistic because taxpayers often report groups of
    assets together such as x dollars of equipment in 2002 so now individual breakdown is
    possible without further information from the taxpayer and because it would require a
    great deal more manpower and/or cost and/or time (unless you can afford a giant staff or
    have only a few accounts to deal with).
•
•   You can however make improvements by better using your existing information and by
    possibly adding a few new fields to your asset data.
•
•   Lets focus on the answers to these few questions:
•
•   How can I get a reasonable value indication for non-reporting accounts? Or how can I
    check to see what accounts may not be reporting accurately?
•
•   How can I get an indication of RCN from other accounts?
•
•   How can I determine the proper trend factors and depreciation factors when the taxpayer
    has purchased used assets?
Add or Utilize the Year Installed AND the Year New
Add or Utilize the Square Footage
                                                             Used Assets


Same Restaurant with 3 scenarios. Owner keeps the TPP, Owner sells and TPP is treated as if purchased new, TPP receives adjusted depreciation
The TPP should have the same VALUE regardless of ownership changes.


                                                           Original                           New Owner
                                                           Paid       30000                      11500
                                                           Year        1987                       1995

Depreciation                                                     Original Owner Keeps       Usual Way                    New Way
     Age    %Good         Trend Factors            TaxYr          Trended   RCNLD             Trended      RCNLD          Trended     RCNLD
    10 yr
        1      92              2002          1      2002              40500     8100              12535      3761 *          12535       8357
        2      84              2001       1.01      2001              40200     8040              12420      4844            12420       8280
        3      76              2000       1.02      2000              39900     7980              12305      6029            12305       8203
        4      67              1999       1.04      1999              39300     7860              12075      7004            12075       8050
        5      58              1998       1.04      1998              39300     7860              12075      8090            12075       8050
        6      49              1997       1.05      1997              39000     8190              11960      9090            11960       8372
        7      39              1996       1.07      1996              38400     9216              11730      9853            11730       9200
        8      30              1995       1.09      1995              37800    11340              11500     10580            11500      11500
        9      24              1994       1.13      1994              36600    14274
      10       21              1993       1.16      1993              35700    17493          *New owner receives more depreciation
      11       20              1992       1.19      1992              34800    20184
      12       20              1991       1.22      1991              33900    22713
      13       20              1990       1.25      1990              33000    25080
      14       20              1989       1.28      1989              32100    26964
      15       20              1988       1.35      1988              30000    27600




Divide the depreciation for the actual age by the amount of depreciation effective when purchased
   To Check Reasonableness of Total Values for
                  Accounts

•
• Group by Business Type (Use Code)
•
• If you have the square footage, divide the value of each account by the
  square footage occupied and get the average $/s.f. Multiply this time
  the square footage of the subject and compare to its value.
•
• If you don’t have the size, just get the average value by Use Code and
  compare this to your subject.
•
• This can be done on a mass basis without too much effort if you have a
  reasonably open system and can get at the data. You can generate these
  predicted average values and list only those accounts that vary by, say,
  more than 50%.
To Generate Assets on Non-Reporting Accounts,
           Build and Apply Models
                 Use Your Data
               Get data from your friends
• Models can be built by using common sense and
  experience or by taking a particular use code and reversing
  out the depreciation to get the RCN. This can be done by
  taking the value of the asset and dividing by the percent
  good used from your depreciation. See what asset types are
  generally applicable to this use code and make a model for
  this use code containing the set of assets along with the
  average RCN per square foot (or just the average RCN if
  size is not available).
• Pool your information with other counties and build
  a bigger database for your models!
    Just How Much Do You Need To Know About An Asset?
•   Tax Year                  •   Override Trend Factor
•   Account ID                •   Scheduled Depreciation Schedule
•   Unique ID                 •   Override Depreciation Schedule
•   Line Number               •   Previous Value
•   Asset Type                •   Value Inclusion
•   Dimension 1               •   Exclusion Percent
•   Dimension 2               •   Associated TPP Account
•   Dimension 3               •   Make
•   Year New                  •   Model
•   Year Acquired             •   Serial Number
•   Date Disposed             •   Park/Complex ID
•   Source of info            •   Registration Number
•   Reported Cost             •   Lease from date
•   Override Value            •   Lease end date
•   System Derived RCN        •   Lease amount per month
•   RCN from table            •   Associated Real Property ID
•   Taxpayer Value            •   Notes
•   Method                    •   District Code
•   Quality                   •
•   Condition                 •   (Total Units)
•   Other Depreciation        •   (Total Depreciation)
•   Other Depreciation note   •   (Value)

•   Scheduled Trend Factor

								
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