Understanding Startup Property Taxes

Understanding Startup Property Taxes

Written by 
James Harvey
May 28, 2021
Understanding Startup Property Taxes

Here at Pilot, our CEO, Waseem, is fond of saying he has two main jobs: making sure the company doesn’t run out of money, and building a solid team. And if you’re a startup founder, those should be high on your priority list, as well. But even if you watch every penny you spend, a surprise tax bill can wreak havoc with your company’s finances. And one tax bill many founders forget to plan for is their business’s personal property tax.

When most people think of property taxes, they think of real estate. If you’re a homeowner, your local municipality or county likely sends you a bill every year, and you pay them some percentage of the value of your house.

In most states, in addition to the real estate property taxes we’re all familiar with, businesses have to pay taxes on their tangible personal property, as well. This is (roughly) everything else a business owns: furniture, inventory, computers, vehicles, etc. If you can move it or touch it, it counts as tangible personal property. In many cases, even the walls of your office are taxable property.

What Property Gets Taxed?

The laws on exactly which personal property gets taxed, and how much, vary from place to place. For the sake of illustration, let’s consider a startup based in San Jose, CA.

California counts any property owned, leased, claimed, possessed, or controlled by a company (aside from real estate) as of January 1 as taxable property for the whole year. But, as in most states, there are a number of exceptions for certain categories of property. Our hypothetical San Jose-based company can exclude inventory, software, solar panels, fire suppression systems, and certain low-value items, but everything else it owns or uses is taxed at a rate of approximately 1%

How to File Startup Property Taxes

In most states, the way the business personal property tax works is that you file a statement with the relevant tax agency listing all of your property, and the tax agency assesses the value of each asset, computes your tax, and sends you a bill.

In California, this process would typically begin with the county tax assessor notifying the startup that is has to file a form 571-L. (Even if you don’t get this notice, if your company owns more than $100,000 in tangible property, you’re still required to file with the county.)

In concept, form 571-L is straightforward: it’s just a list of everything your company owns, when you bought it, and how much you paid for it. In practice, there are a lot of rules and plenty of nuance about exactly how to account for everything you own. Just like with your books, it’s something you may be able to figure it out on your own when your business is small and simple, but it’s not really a good use of precious founder time, and you’ll have better results if you work with a tax professional, instead.

After filing your statement with the county, the assessor’s office will determine how much your property is worth. If you disagree with the assessment, there is an appeals process, but that’s beyond the scope of this article. Suffice to say, if you get that far, you should definitely be working with a professional.

When Are Property Taxes Due?

The tax calendar is different in every state. In California, form 571-L is due April 1, but you can file without penalty as late as May 7. After that, you can still e-file up to May 31, with a 10% penalty added to your tax due.

Don’t Go It Alone

Personal property tax is just one small piece of your company’s financial picture, but there are many more taxes, fees, and regulatory requirements like it. If you’re a founder, you could easily spend dozens of hours a week learning everything you need to know, and you’ll still probably have questions. And in any case, your time is better spent on the things that are going to make your company succeed.

Instead, you can partner with Pilot to make sure your books are accurate and useful, to prepare and file your taxes, and to plan for your company’s financial success.

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Suggested Reading

How to Fill Form 8995

How to Fill Out IRS Form 2210

Instructions for Filling Out Form 941

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