Types of Business Property
Business property comes in several different types.
Real Property
Real property, also called real estate, is property that includes land and buildings, and anything affixed to the land. For a business, real property would include warehouses, factories, offices, and other buildings owned by the business. Real property only includes those structures that are affixed to the land, not those which can be removed, such as equipment. Real property may also be determined to include:
Whatever is beneath the surface of the land, such as minerals, natural gas, and oil Rights to the use of property Leasehold improvements (improvements to the property), since these improvements cannot be removed.
Personal Property
Personal property is any property not attached to the land or to structures on real estate. In other words, it’s movable. Some examples of personal property owned by a business are equipment, furniture and fixtures, and vehicles.
Listed Property
Listed property is a specific type of personal property of a business that comes under increased scrutiny by the IRS. Property of this type may be used for either business or personal reasons, so the IRS more carefully monitors deductions for payments for this type of property and for deductions for use of this type of property. Included in listed property are business vehicles, computers, and other electronics.
How Business Property Affects Business Value
Business property is shown on the balance sheet of a business as business assets. Real property is shown first, then personal property. Accumulated depreciation on personal property (real property is not depreciated) is shown on the asset side of the balance sheet, so the net value of the specific property is shown.
Selling Business Property
Because the sale of business property affects income taxes and real estate taxes, the sale of business property must be recorded and included on your business tax return. IRS Form 4797, Sale of Business Property, is used to record:
The sale or trade of property used in a businessInvoluntary conversion of property held over a yearOrdinary gains and losses on business propertyGain from the disposition (sale) of specific types of business propertyRecapture of property under Sections 179 and 280F(b)(2) when business use drops to 50% or less
The sale of business property may result in a short-term or long-term capital gain or loss.
How Business Property Affects Business Taxes
When your business owns property, there are several ways it will affect your taxes.
Property Taxes by Localities
If your business owns real property (land and buildings), you must pay property tax on this property. Just as individuals must pay property tax on the assessed value of their homes, businesses pay property tax on the assessed value of their real estate. Property taxes are assessed by local entities—towns, cities, counties, villages, and the like—for local purposes, such as schools, roads, or improvements in infrastructure. Each state coordinates and oversees property taxes in all localities. Three types of county officials are involved (with different titles in each location):
Property appraisers establish the value of your propertyTax collectors send tax bills, collect payments, and approve deferrals and exemptionsA value adjustment board hears and rules on challenges to a property’s assessment, classification, or exemptions
Depreciation on Business Property
The most important tax benefit to buying business property is that you can take a depreciation expense on long-term business property, like equipment, vehicles, machinery, computers, and furniture. The federal tax laws give incentives to businesses for buying property, in the form of accelerated depreciation. This depreciation allows you to take all or part of the expense of buying the property during the first year. The two types of accelerated depreciation are Section 179 expenses and bonus depreciation. The amounts you can deduct each year can change, as do the requirements, so check with your tax professional before you make any buying decisions. Depreciation on listed property may need to be taken using the alternative depreciation method. This method requires an increase in the number of years over which a property is depreciated, decreasing the annual deduction.
Expenses for Use of Business Property
Expenses for use of personal property (such as business driving expenses) are legitimate deductible business expenses, as long as you can show that these expenses are truly business-related. Interest expenses on the sale of business property are also included in your business tax return.
Keeping Records on Business Property
It’s important to keep excellent records on the purchase of all types of business property, as well as records on mortgages, liabilities, and expenses associated with the purchase and maintenance of all types of property. Proper records help you document your expenses and provide evidence to the IRS in the event of an audit. They are also useful if (or when) you sell the property. Business software can help you maintain good records. The IRS recommends keeping your business property records until the period of limitations expires for the year you sell the property.
