February 20, 2024

How to Prepare for a Business Personal Property Audit

State and Local Tax

Personal Property Tax


Minutes to read

Navigating the world of business personal property audits can be a complex journey, with varying practices across different states.

Whether you operate in a state known for frequent audits or where they are less common, it's crucial to be prepared.

Clear policies, procedures, and methods are important to prepare your business for routine and unexpected audits.

Unexpected audit findings can significantly disrupt your business plans and affect your company's financial well-being. However, audits don't always have to be stressful if you take a proactive approach throughout the year.

Remember, readiness is your strongest ally in personal property audits, helping you navigate these waters confidently and efficiently.

What is a Business Personal Property Audit?

To understand business personal property audits, you must first understand the basics of personal property tax (PPT).

PPT is a tax levied on the tangible personal property businesses own. This includes machinery, tools, furniture and fixtures, computers, supplies, inventory, and other assets that aren't considered real estate.

A business personal property audit assesses and verifies the accuracy of a company's reported tangible assets. These audits are not just about compliance; they're also about financial integrity.

Accurate asset reporting is crucial for clearly understanding a company's financial health. It influences critical business decisions and investment plans and can even affect the company's market value.

How Do I Prepare for a Business Personal Property Audit?

1. Review Internal Policies and Procedures

Begin by evaluating your existing policies and procedures. You must ensure they are up-to-date and reflective of your current business operations. This step sets the foundation for an organized and efficient future audit.

Any recent changes to your business? They may warrant an adjustment in your policies and procedures.

2. Understand Jurisdiction Requirements

Familiarize yourself with local guidelines to ensure compliance in each jurisdiction in which your business operates. Each jurisdiction has varying audit practices and mandates.

You’ll need to review:

  • The jurisdiction where your business has a physical presence.
  • The jurisdiction where you own or use tangible personal property (including leased equipment or consigned inventory).
3. Maintain Robust Documentation

Keep detailed records of the methodologies and positions you've used in past and current business personal property filings. This includes incorporating any changes that arose from previous audits into those renditions.

Thorough documentation can significantly streamline any future audit process.

4. Analyze Mergers or Acquisitions

If your business recently experienced a merger or an acquisition, understand how the related assets were recorded, particularly their cost basis. This understanding is vital as it can influence future property tax filings.

5. Monitor Company Policy Changes

Review any internal policy changes that could impact the assets reported on your renditions, such as a change in your capitalization policy.

Significant year-over-year changes in the reportable basis of assets should be documented, as they can draw attention during an audit.

When Might My Business Need Help with an Audit?

You Anticipate a Regular Audit Cycle

Some businesses experience regular audit cycles based on where their physical presence is concentrated.

For example, according to California Revenue and Taxation Code Section 469, California assessors must conduct a “significant number” of audits each year; taxpayers with more meaningful assessments are generally audited every four years.

North Carolina jurisdictions also audit more frequently than other states and often use independent third-party auditors to handle those audits for them.

Other states audit less frequently or may even audit during an appeal.

Knowing when your last audit cycle ended can help prepare your business in advance.

You Receive an Audit Notice

When you receive an audit notice from a jurisdiction or a third-party auditor, your business will have a short window of time to respond. You’ll need to respond to the audit notice and provide the information requested.

Businesses often need assistance during this stage to accommodate the strict deadlines. Though you can request an extension, they may or may not grant it unless you have valid reasons.

You Need More Resources and Knowledge During an Audit

If you are in the middle of an audit, lacking the necessary resources or expertise, it's time to seek expert help.

Utilizing outside expertise can be especially beneficial when dealing with third-party audits or multi-jurisdictional audits - when one county in the state performs an audit on behalf of several counties in that same state at the same time.

You Received Your Audit Findings

Once the audit is complete and you receive the preliminary findings, your business needs to review the findings thoroughly.

If you've managed the initial stages independently but now face findings that could be contested or appealed, expert assistance can guide you through the review and appeal process.

Remember that the window for appealing audit findings is typically quite narrow.

How Do I Maintain Audit Readiness?

Audit readiness is a continuous and proactive process that requires diligent management of various aspects of your business's tangible personal property.

Maintain policies and procedures around the following areas to guide your audit readiness.

Fixed Asset Acquisitions
  • Establish clear procedures for recording fixed asset acquisitions in your books.
  • Break down invoices into component parts (tangible vs. intangible costs).
  • Be specific when assigning asset classes in your general ledger.
  • Review your assets to identify any non-taxable or real estate related items.
Fixed Asset Disposals
  • Track assets for their existence and conduct regular reviews to remove any “ghost assets.”
  • Ensure disposals are accurately reflected in your books at the time they occur.
Expensed Assets
  • Ensure your company has a clear capitalization policy that is followed.
  • Maintain detailed records of expensed tangible assets, as jurisdictions may request that detail upon audit.
Assets That Move Between Locations
  • Record assets that move between locations, states, or counties – these jurisdictions may each have different taxable basis and filing obligations depending on the asset location as of the assessment date.
  • Prevent exposure risks by identifying assets correctly by location, especially in taxable vs. non-taxable jurisdictions.
Supplies, Inventory, and Leased Property
  • Determine the correct location assignments for these assets and render them accordingly.
  • For supplies, ensure you know the reporting requirements (if they are taxable, and if so, at what basis)
  • For inventory, record the appropriate cost in your general ledger, including allowable adjustments or deductions in the appropriate accounts.
  • For leased property, clarify the tax responsibility for leased property – whether it lies with the lessor or the lessee.

Whether you're anticipating an audit cycle, responding to an initial notice, or deciphering the aftermath of audit findings, the power lies in anticipation and action. Stay informed, stay prepared, and view each audit not as a hurdle but as a checkpoint toward greater financial clarity and integrity.

At Clearview Group, our PPT experts will be your audit readiness partner. Through every jurisdiction and every nuance, our experts will give you peace of mind knowing your business is ready for its next – or current – audit.

Talk to our experts for a tailored approach to prepare your business for its next business personal property audit.

Megan Lusby
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