What Are Business Property and Real Estate Taxes?

business pays property taxes in Virginia
••• Michael Marquand / Getty Images
DEFINITION

Property taxes are taxes businesses pay on private property owned by the business, including real estate, personal property, and business inventory.

Key Takeaways

  • Property taxes are local and state taxes, paid to local and state taxing agencies.
  • Some states tax business inventory as a special kind of personal property.
  • You may be able to deduct part of your business property taxes on your business tax return if you meet IRS requirements.
  • Businesses pay tax on real property (land and buildings) and personal property (other types of property). 

How Do Property Taxes Work for Businesses?

States and cities charge property taxes on both real property and personal business property by simply multiplying the property tax rate by the percentage of the value of the property that is taxed. 

If your business owns real estate, you must pay property tax on this property. In the same way, as individuals pay property tax on the assessed value of their homes, businesses pay property tax on the assessed value of their property, including real estate.  Property taxes are called ad valorem (value) taxes because they are calculated on the value of the property.

 The value of a property for property tax purposes is not the same as fair market value, which is the price in a transaction between a willing buyer and seller with no compulsion to buy and each having all the facts about the property.

When you buy taxable property for your business, the property will be registered with the appropriate taxing authority, and you will receive information on the changes in your assessed value and the amount of tax you owe each year. After you receive the assessment, you will receive the tax bill based on that assessment. 

It's possible to contest the assessed amount. The assessment bill should have information on the process for doing that, or you may need to contact your locality for information on this process. 

Example of Property Taxes

Business property comes in several types: 

Real property or real estate: land and any improvements to that land (buildings, for example).

Personal property is property that is not land and buildings. The personal property of a business includes cars, machinery, furniture, shelving, and equipment. Taxes may differ for the two main kinds of personal property:

  • Tangible property, with substance
  • Intangible property, including intellectual property (copyrights, trademarks, patents) that has no substance

Inventory is a kind of personal property. It’s the value of goods currently stocked and shelved in a company facility, like a store or warehouse. 

How Are Property Taxes Calculated and Paid?

Property taxes are assessed by local entities—towns, cities, counties, and villages—for local purposes, such as schools, roads, improvements in infrastructure.

When you purchase real estate for your business, the property will be registered with the appropriate taxing authority, and you will receive information on the changes in your assessed value and the amount of tax you owe each year.

After you receive the assessment, you will receive the tax bill based on that assessment. Yes, it's possible to contest the assessed amount. The assessment bill should have information on the process for doing that, or you may need to contact your locality for information on this process. 

Deducting Property Tax as a Business Expense

The IRS says you can deduct property taxes, but they put some limitations and restrictions on what portion of your property tax is deductible as a business expense: 

You can deduct the portion of your property tax that is levied based on the assessed value. 

You cannot deduct any portion of your property tax that is levied on "local benefit." According to the IRS, this includes taxes charged for "local benefits and improvements that tend to increase the value of your property. These include assessments for streets, sidewalks, water mains, sewer lines, and public parking facilities. You should increase the basis of your property by the amount of the assessment."

Just to confuse the matter, even more, the IRS says you CAN deduct the portion of local benefit taxes if they are for maintenance, repairs, or interest charges. You'll have to look closely at your real estate tax bill and separate it out into the taxable and non-taxable portions. 

Check with your local taxing authority for more information on real estate taxes on your business property. Since property taxes are specific to each state, you might also go to your search engine and type in "property taxes [state]" for more information.

Article Sources

  1. International Society of Appraisers. "Defining Market Value."

  2. IRS. "Publication 535 (Business Expenses)."