If your business is like most businesses, it owns and uses what is known as “tangible personal property” (or, more simply, “personal property”). This property commonly is subject to certain taxes at the state and local level, and special tax rules at the federal level, that it’s worth your while to know about.
Broadly speaking, “tangible personal property” covers most goods and products that a business, or for that matter an individual, may own and use. Some important examples of tangible personal property relevant to businesses are:
As already mentioned, these items are often referred to more simply as “personal property,” although, technically, some personal property may be intangible rather than tangible.
By the way, don’t be confused by the word “personal” in the term “personal property.” “Personal property” does not refer to property only for personal, rather than business, use. On the contrary, personal property covers various goods and products that may be owned by an individual or business, and tax laws specifically distinguish between personal property for personal use and personal property for business use. Here we’re talking about the latter type of personal property--business personal property.
The first point at which you’re likely to pay tax on business personal property is when you buy the property. The vast majority of states require that a sales tax be charged on the sale of most tangible personal property. The tax generally is collected at the time of purchase. Moreover, even if your business is not charged sales tax by a seller—perhaps because the seller is located out-of-state and the purchase was made over the Internet—you nonetheless are generally expected to pay the equivalent amount in use tax directly to the state for that purchase.
You’ll probably also need to pay an additional, annual tax on your business’s personal property via a filing with your local government. The tax, which most states authorize individual cities or counties to collect, is based on the current value of the property. The details of the annual filing, the specific types of personal property covered by the tax, and the tax rate will vary from one locale to another. However, most cities and counties do require businesses to pay this tax, unless a business is subject to a specific exemption. For more information, check the assessor’s office section of your city or county’s website.
In contrast to state and local rules that require you to pay tax on business personal property, the IRS generally looks at purchases of business personal property as deductible business expenses. In fact, by taking the purchases of business personal property as deductions, you may be able to reduce the effective cost of those purchases by 40% or more.
The IRS more specifically states that, in order for a personal property purchase to be eligible for deduction on your business’s federal tax return, the purchased item must be “ordinary and necessary” for your business. However, the IRS provides only general guidance about what “ordinary and necessary” means. “Ordinary” expenses are those that are “common and accepted” for your type of business and “necessary” expenses are “helpful and appropriate” for your type of business—though they do not have to be indispensable. In addition, for personal property to be deductible, it must be primarily for business use. For example, a desktop computer in your office, store, or warehouse that you use only to create and maintain all of your business’s financial information is clearly property for business use. However, a tablet computer that you keep at home and frequently use for watching movies, reading magazines for pleasure, and having Skype conversations with friends, but also use to receive and send business email, is a more questionable case.
For federal tax purposes, your business’s personal property can be divided into two categories: items that will be used up in one year or less, and items that will last for more than one year. The IRS treats these two categories differently. More specifically, the second category is subject both to depreciation and to Section 179 of the Internal Revenue Code. Depending on your specific circumstances, you may find either that it makes more sense to depreciate a piece of eligible property over a number of years, or to use Section 179 to immediately and fully deduct the cost of otherwise depreciable property in the current tax year. (For more information on depreciation and Section 179, see Section 179: What Every Business Owner Needs to Know and the Business Taxes & Deductions section of the Nolo website.)
Tangible personal property is by no means the only type of business expense that’s deductible on your federal taxes. Just a few of the other such expenses, which are not covered in this article, are: vehicle expenses, licenses and dues, utility bills, and professional fees. Moreover, inventory, which is also a type of tangible personal property, is subject to distinct tax rules, and also is not covered here. For guidance on federal taxation of inventory, check IRS Publication 334.
Paying sales tax or use tax is relatively simple, as is paying your city or county’s assessment on your business’s personal property. However, the details of depreciating business personal property, and of using Section 179 of the IRS rules, may be complicated enough to lead you to seek outside assistance. Apart from the Nolo articles mentioned above, IRS Publication 946 provides much helpful guidance on both depreciation and Section 179, and IRS Publication 535 provides guidance on business expenses generally. However, if you have any lingering questions, you shouldn’t hesitate to consult with a tax professional. Also, for a highly readable compilation of many important small business tax issues, including federal taxation of business personal property, check Tax Savvy for Small Business, by Federick Daily (Nolo) and Deduct It!, by Stephen Fishman.