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Property Tax Relief Planning During Times of COVID

                 

By Karen J. Koch, CPA, MT and Josh Malancuk, CPA

Originally Published in The Tax Advisor AICPA newsletter April 2021

 

As we mark the one-year anniversary of the COVID-19 lockdowns, the economic fallout may be felt for years. But only recently have homeowners and business owners come to grips with the pandemic’s impact on their property taxes. While the impact of lost wages and retail receipts was felt almost immediately in city coffers, property assessments are only now starting to take effect — and most assessors have massive budget holes to fill.

When the new property tax rates and assessments start arriving in the mail, jaws will be dropping in many parts of the country — especially among business owners. But instead of getting angry, taking the right approach to a solution can substantially improve your client’s ability to negotiate and reduce their tax hit for years to come. Don’t rush into this decision, and it’s not an area where you want to be a do-it-yourselfer.

Many state and local governments maxed out their emergency services and aid programs in 2020. As operating costs rose dramatically during the pandemic, those costs will likely be passed on to their business property taxpayers in the form of tax levy increases through rising tax rates. These tax torpedoes will hit capital-dependent businesses especially hard during the next year or two.

First let’s look at which clients might be most in need of help.

 

Hardest Hit Industries

There are three major property types expected to be vulnerable near-term:

1. Manufacturing. Most manufacturers own large buildings and lots of equipment. States tend to impose heavy real estate and personal property taxes on manufacturers. That’s not likely to change, even though the pandemic has significantly reduced manufacturers’ customer demand, production, and revenues. Why? Because property tax represents a regressive tax burden to these capital-intensive businesses. Also, since many manufacturers are facing cash-flow challenges, they are finding it difficult to honor their debt obligations. As the COVID crisis drags on, more and more manufacturers may struggle to recover — and may even declare bankruptcy — depending on how robust (and effective) government intervention is.

For clients in manufacturing, the solution can be as simple as knowing the exemptions or valuation allowances that a particular state offers to manufacturers — opportunities that many manufacturers and their financial advisers frequently overlook.

2. Hospitality. The travel and hotel industries were especially hard hit during the pandemic. In fact, the hit on the travel industry was nine times worse in 2020 than it was after the 9/11 terrorist attacks. A November 2020 survey by the American Hotel & Lodging Association found that 71% of U.S. hoteliers could not survive another six months without further government assistance. Although many hotels are in danger of losing their properties to foreclosure, their property tax payment obligations have not been suspended. Hotels are generally taxed heavily on their real estate because of their construction costs and high ongoing revenue potential.

3. Senior care. The pandemic hit senior centers especially hard in 2020 from both a financial and safety perspective. Most senior communities are not accepting new residents and many families moved their loved ones out of senior communities during the COVID crisis, unsure about when they will return. Reduced occupancy, rising operating costs, and declining revenues caused by rent concessions have created a perfect storm of financial hits for senior care operators. Considering the already-high property taxes senior communities pay for additional décor, living amenities, and specialty equipment, there’s concern there won’t be enough facilities open to handle the needs of the ever-growing senior population.

 

How Business Property Owners and Their Advisers Can Defend Themselves Post-COVID

First, keep abreast of legislative announcements that could affect business clients’ taxes. Next review clients’ property tax assessments with them every year. It’s amazing how often we find errors, miscalculations, or outdated information when reviewing our clients’ assessments. Correcting these errors and arguing the client’s case the right way can provide businesses with substantial long-lasting savings. Local assessors aren’t necessarily out to get clients, but they’re challenged to do everything they can legally do to help governments plug massive budget shortfalls.

Due to the current business conditions caused by the pandemic, property values may be much lower than what local tax assessors have on record. There could be significant opportunities to lower clients’ property taxes starting this year. Documenting their COVID-induced valuation losses can open the door to significant tax savings at a time when businesses need all the help they can get.

The key to appealing successfully is starting the review process well before the client’s annual deadline for property tax return amendment and real property tax protest. Many municipalities use an April 1 cutoff, but don’t assume that’s the case in your locale. Check with your local tax assessor so clients don’t overpay in 2021 and have to wait another 12 months to appeal.

A Suggested Review Process: Key Steps
  1. Assess initial real and personal property tax opportunities.
  2. Compare assessment with market data analysis.
  3. Identify and calendar statutory deadlines.
  4. Implement findings through appeals or amendments.
  5. Validate secured savings through property tax statement review.

When assessing COVID-related property tax valuation adjustments, ask clients these important questions:

  1. How has COVID affected the company’s sales revenue?
  2. What additional expenses are being incurred while operating in the COVID business environment?
  3. Has your facility and equipment utilization been impacted during COVID and why?
  4. How has COVID affected your company’s workforce and headcount?
  5. What happened to the supply chain during the pandemic?

Next, build a business case for reducing your client’s assessment. Typically, you’ll have to do both qualitative and quantitative analysis of their business circumstances and analyze the loss of value by using common appraisal methods for real and personal property. Here are some industry-specific factors to review for sectors heavily impacted by the pandemic:

  • Manufacturers: Utility, expense analysis, and recent sales.
  • Hotels: Income approach analysis that includes an examination of average daily rate (ADR), revenue per available room (RevPAR), and occupancy.
  • Senior care: Income approach that includes an examination of occupancy, revenue, and expenses.

Typically, the analysis is prepared in conjunction with appeal protest periods and may include procurement of a third-party appraisal. Meeting these protest and exchange deadlines is essential for securing relief. Again, it will likely be well worth a business’s while to enlist an experienced team to advocate for the company and to improve its chances of a successful property tax appeal.

 

Helping Clients Save Money

An effective COVID-era property tax relief plan starts with getting ahead of appeal deadlines. Knowing which type of analysis to prepare and the best way to handle negotiations at local and state level administrative hearings can make or break the client’s case. Having worked hard to help clients build their businesses, why not attempt to reduce one of their biggest annual expenses and headaches — so they can retain more money for reinvesting in the business — and their employees?

Start early, work the plan, and bring in practitioners with experience in property tax appeals to assist. Because property tax filing rules and valuation methods are complicated, expertise is needed to appeal successfully. The penalties (and lost potential savings) are too great to risk.

 

— Joshua Malancuk, CPA, CMI, is president of JM Tax Advocates (www.jmtaxadvocates.com) in Fishers, Ind., and Karen J. Koch, CPA, MT, is a partner with Bedford Cost Segregation (www.bedfordteam.com) in Louisville, Ky.