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Are Intangible Assets Being Included in Your Property Tax Assessment

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As the pandemic continues to cause havoc in everyone’s day to day life, financial survival is driving many decisions at all levels of society.  This is true with individuals as well as in government. As consumer spending remains much lower than usual, government tax collections are also much lower. Among the many different types of government funding, one is the collection of property taxes. Bear in mind that different taxing authorities include different categories of assets when applying their tax rates. This means that not all types of assets are subject to tax. It is important to know whether intangible assets are included in the assessments. If not, the property owner may be paying more in taxes than they are required to pay.

For property tax purposes, many taxing authorities use either a unit valuation or a summation valuation principal. In a unit valuation, all the taxpayer’s operating assets are valued collectively. This results in one value for the entire property. In a summation valuation, separate asset categories are valued individually. Therefore, if a jurisdiction applies the unit valuation principal to tax a property which does not require all property categories to be taxed, then it is possible that the tax is over-stated. One category of asset that is excluded from property taxes in most jurisdictions are intangible assets. 

To avoid any over-statement of taxes due, the taxpayer or his/her advisors must first determine if the tax is only due on their tangible property. If so, and if the taxing authority is using the unit valuation principal, the property owner should have separate valuations of the tangible and intangible property. Intangible assets can include Trade Names or Trademarks, Customer Lists, Patents, Software, Technology, Domain Names and others.

Three methods of valuation are available for use by tangible asset appraisers when developing a reasonable opinion of value: the cost approach, the direct market comparison approach to value and the income approach. It is the tangible asset appraisers’ job to determine the most appropriate approach(es) to value for a specific assignment.

Each of the three methods of valuation has advantages and disadvantages in application. In addition to considering each of the three methods, appraisers must state why a method of valuation is being excluded from consideration as well as why a method has been selected for use in order to comply with the Uniform Standards of Professional Appraisal Practice (USPAP). For example, the cost approach might be excluded because the available cost data might not be “historical” (data from when an asset was originally placed into service).  The direct market comparison method could be excluded because comparison data might be limited or not applicable.  The income approach is often excluded because the data available is insufficient for direct attribution to specific assets.

Intangible assets can also be valued using the same three approaches to value as tangible assets.  For example, Software or Technology may be valued based on the cost to develop the asset. Patents, Trade Names and Trademarks are often valued based on a market approach, where royalties paid for similar assets are applied to revenue or income generated by the asset. The income approach is utilized in valuing Customer Lists and Covenants Not to Compete. If an income stream can be separated for the individual asset, the most common way is through an income approach. The income approach is a technique by which value is estimated from the amount of the cash flow or benefits that an asset is expected to generate over its useful life. Income approach methods typically include the excess earnings approach and the relief from royalty approach.

When valuing an intangible asset, to compensate for added risks associated with the asset, adjustments are made to the Company’s base discount rate. Expected returns for intangible assets are higher than a company’s overall return requirements because of additional risk associated with intangible assets. The higher returns compensate for added risk that investors must absorb as cash flows attributable to specific intangible assets are less certain than cash flows from more liquid assets (tangible assets like accounts receivable and inventory). Intangible asset returns are also subject to investment illiquidity, longer holding periods, and sometimes capital losses due to failure.

It is important for tax payers to make sure they are being taxed properly on their assets, and should make sure that any intangible assets owned are excluded from the taxable property (if the law states that intangible assets are excluded).

Robert Mulhearn, Sobel EAC Valuations

Robert Mulhearn, CFA, has been providing expert business valuations to Sobel EAC Valuations for more than 5 years.  Prior to his current role, Bob had more than 30 years’ experience in valuation with several companies, including 11 years with Enterprise Appraisal Company, the founding entity to Sobel EAC Valuations.