ASSET MANAGEMENT AND CLASSIFICATION

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1 ASSET MANAGEMENT AND CLASSIFICATION David Ryan Selena Longway Director Principal True Partners Consulting LLC SC&H Group LLC Chicago, IL Sparks, MD

2 LEARNING OBJECTIVES Assess potential issues in fixed asset management that may impede optimal classification for property tax reporting Identify ways to better align property tax considerations with other tax/financial considerations when capitalizing and maintaining fixed assets

3 LEARNING OBJECTIVES Determine the most appropriate reporting category, life, and table for personal property tax reporting purposes Recommend and implement proactive measures to reclassify assets and/or challenge a jurisdiction s classification to minimize tax liability

4 LIFE CYCLE OF AN ASSET Asset acquired Asset disposed Depreciation recorded Asset verification (inventory)

5 IMPORTANCE TO PROPERTY TAX Accuracy and consistency in reporting depend on accuracy and consistency in fixed asset management and classification Inaccurate classifications can increase property tax liabilities Controls in asset management and classification can help ensure returns are audit-proof Bottom line: fixed asset groups must understand the property tax ramifications

6 CAPITALIZATION POLICY What is the capitalization threshold? (And how are bulk purchases handled?) How are assets mapped to fixed asset general ledger accounts? Are sales & use taxes capitalized as part of the item s cost, or as a separate line item? Are any items expensed that may be taxable?

7 FIXED ASSET MANAGEMENT SOFTWARE What system is used? What are its capabilities and limitations? Reporting options defining best reports/exports to use as basis for property tax reporting Include all fields that might assist with classification not necessarily part of canned reports Does company maintain separate books? What cost basis should you be using?

8 FIXED ASSETS POLICIES & PROCEDURES Who is responsible for entering assets? What rules exist for entering assets? Consistency in descriptions and asset numbers Entry at item level, invoice level, or project level Treatment of software, sales tax, freight, installation Treatment of asset transfers Acquisitions of the assets of another company

9 FIXED ASSET DATA RETENTION How long is underlying support for assets retained, and how is it stored? What type of information is retained? Capital acquisition reports Invoice-level detail Actual invoice copies

10 COST SEGREGATION STUDIES Purpose of cost segregation studies is to separately identify component costs of construction for income tax reporting purposes Segregate 39-year assets from those with shorter lives (5, 7, and 15 years) Definitions of real and personal property differ for income and property tax purposes If performed with property tax in mind, cost segregation studies can be an excellent source of detailed information about assets being reported or excluded

11 COST SEGREGATION STUDIES Asset Description Cost FFE - 7 yr 230,157 Detail of Asset per Cost Segregation Study Cost Wallcoverings & paint 115,982 Supply carpet for suite 39,855 Flooring - wood installation 22,000 Electrical - relocate lights 6,492 Install & remove VCT 45, ,157

12 REPAIRS AND MAINTENANCE Capitalized vs. expensed Does company s capitalization threshold apply? (Treatment of R&M may be contingent upon its cost) If capitalized, what is acquisition date? Does the R&M serve to extend the asset s life? Is the original asset s cost adjusted, and if so, how?

13 DISPOSITION OF ASSETS What is the policy for identifying and recording disposals? Is the policy being enforced? Unrecorded disposals $0 Net Book Value assets policy for write offs

14 FIXED ASSETS GROUP LIAISON Understand reasoning for your company s policies and procedures for capitalizing assets Is it possible to make changes where property tax goals are not served by existing policies and procedures, or is a workaround necessary? Expansions, new facilities, other large projects Work with fixed assets to ensure adequate level of detail for property tax purposes If possible, get involved before vendor invoicing to influence level of detail on the invoices themselves

15 FIXED ASSETS VS. REALITY Asset tagging and physical inventories is there a policy? Alternatives to physical inventory Schedule regular review of fixed assets by facility personnel Fixed asset modeling Use of equipment maintenance software to supplement fixed asset data Manufacturing M&E Medical equipment IT equipment

16 FIXED ASSET CLASSIFICATION Build upon solid foundation of fixed asset management policies and procedures that support property tax reporting Proper classification is only possible if: Assets are accurately recorded and maintained Fixed asset system includes sufficient level of detail Perform annual reconciliations

17 LIVES AND DEPRECIATION TABLES Look beyond the return category Critical to understand lives and tables being applied by the assessing authorities Proactive reporting (educate the assessor) Reconciling assessments once issued

18 REAL VS. PERSONAL Do not assume that return reporting instructions are consistent with statutory reporting requirements Remember the cost segregation study When there is potential gray area, request real property record card to identify which assets are included vs. which assets need to be reported/assessed as personal property

19 STATUTORY TABLES AND FMV Proactively challenging statutory classifications, lives, and tables Remember that statutory tables to not take into consideration all forms of obsolescence, nor were they designed with your assets in mind: what is unique about your property? Understand what is happening with the assets can an obsolescence adjustment be taken on the return? Any other filing positions?