How To Be Prepared For A Business Personal Property Tax Audit: Tips From Bookkeepers & CFOs

By: Jeff Heybruck

As a fractional CFO and bookkeeping firm, we’ve gone through our fair share of business personal property audits with clients. This isn’t surprising considering that North Carolina jurisdictions have a reputation for frequent audits and that NC is a “fully taxed” state in terms of treatment of business personal property.

During an audit, an assessor from a county or local government (or a third-party auditing service sent on their behalf) reviews filed business property tax listings and asks any resulting questions. The audit may cover returns for one or multiple years.

It’s impossible to predict if and when a business is selected for an audit (though larger, more complex businesses with more to gain from an audit are more likely to get singled out). Should your business be selected, having several bookkeeping and tax documents in order will mean an easier process for the business. Businesses only have a short window of time to respond once an audit notice is received.

Having documents in order could also mean a better outcome (ie. no changes to existing tax liabilities as a result of the audit).

What is business personal property?
Business personal property includes tangible assets owned by a business that are movable and used for operations. Examples of business personal property include machinery, equipment, office furniture, computers, electronics, inventory, vehicles and supplies. Business personal property does not include real estate, but may include leasehold improvements (improvements made to leased real property).

What documents should I have to prepare for a business personal property audit?

Here are the key documents to have in order in case of a business personal property tax audit. (Note: The auditor may not ask for all the documents below. To avoid confusion, provide the auditors only the documentation they request.):

1. Business Personal Property Tax Listing Form Filed – Filed each year, a Business Personal Property Tax Listing form breaks down all business personal property that a business owns into categories. The State of North Carolina , for example, asks the business to categorize property into Machinery & Equipment, Construction In Progress, Office Furniture & Fixtures, Computer Equipment, Improvements To Leased Property and Expensed Items and Supplies. The form also asks for additional detail about vehicles, mobile homes or offices, leased property, any farm equipment, real estate improvements and outdoor advertising structures (eg. billboards). When it comes to these filings, having copies on hand and ensuring accurate filings are the two keys to have everything buttoned up in the event of an audit.

2. Local State Tax Return – Auditors might cross reference the business’s local tax return, as it may list equipment or property purchases, and compare it with what was reported on the business personal property tax listing. The total cost of assets reported on the property tax listing should match up to what is reported on the tax return. It may also be used for verification of business income (which can sometimes mean exemptions on business property tax) and general verification that the business is operating and filing appropriate tax returns.

3. Depreciation Schedule – The depreciation schedule helps auditors assess whether you’ve been reporting the correct value of your business property on your tax filings. As property depreciates (loses value) over time, the taxable value should reflect that decrease. The depreciation schedule details this decline. There are different depreciation methods allowed by tax regulations (e.g., straight-line, accelerated depreciation). The auditors use the schedule to confirm you’re using an appropriate method for each asset category. Inconsistencies between your depreciation schedule and your reported property values can signal potential errors in your filing. The auditors can use the schedule to identify these discrepancies and ensure you’re paying the correct amount of tax. The depreciation schedule also typically includes the estimated useful life of each asset. Auditors can review these estimates and ensure they’re reasonable for the specific property types.

4. Trial Balance in Accounting Software – The trial balance is a listing of all Accounts in the GL and their ending balances at a specific date. Accountants (and the auditors) use the trial balance to ensure the total debits in all accounts equal the total credits to identify any errors in the bookkeeping math. Auditors can use it to compare balances with figures in the business property tax filing. For instance, the trial balance might show a higher value for equipment than what was reported on the property tax listing. This discrepancy could prompt the auditor to investigate further.

Other Documents:

5. An Excel Spreadsheet of Asset Listings – This is for the business to use to back up any discrepancy claims the auditor might make. Lucrum’s sheet contains a “Year” column and is then organized by each bucket on the BPP form and different asset classes. This sheet can then be matched up in QuickBooks or the Accounting Software so that all business property ties to the GL and the Net ties out as well. Note that we don’t provide this to the auditor but it’s our internal check to match the GL or Depreciation schedule to the BPP Listing form. If an auditor says that XYZ asset isn’t listed, we can tell them within 30 seconds what year layer and what category it is listed in. Or we know if we made a mistake.

Business Personal Property Tax Audits FAQs

How far back will a business property tax audit go?

Normally auditors are looking at activity over the past 1 to 2 years. Typically, this is looking at the previous calendar year, so if your business is running on a fiscal year not aligned with the calendar year, make sure to keep documentation on hand for each calendar year too.

Will the auditors come on site?

Sometimes. This is certainly a less desirable situation. Often an onsite visit can be avoided by ensuring that full and transparent documentation is provided upfront. We generally do NOT want the auditor to come onsite and try to give them the information as quickly, neatly, and nicely as possible to discourage an in-person meeting.

Do you have any tips for whoever is preparing my BPP Listing form?

Yes!

1. Record disposals! Too often CPAs don’t have this information and also don’t ask for it. Make sure that they know what you’re getting rid of. Gains or losses from asset disposals need to be reported on tax returns. Keeping accurate records ensures avoiding errors or missed deductions. Maintaining a record of disposals creates a clear audit trail. In case of an audit, the documented disposals demonstrate proper handling of company assets.
2. Categorize by Asset Category. Remember that spreadsheet of assets we talked about maintaining above? Make sure it’s organized by the actual category of the asset. Otherwise, you’ll only be able to see a list of assets and not have visibility from one year to the next where the business owner, CPA or whoever prepared the form allocated the assets. Some are simple like computers and software where as others could go in multiple locations depending on how one looks at it.
3. Record each individual asset. When we take over BPP reporting for a new client we often see “Equipment” listed as a sum for all the equipment purchased that year. But what happens if one item is disposed? It makes it hard to know which category it was allocated to and isn’t easy for a business owner to review to identify any assets that were disposed during the year. Seeing a Dell laptop 7 years old is a pretty big red flag; it’s highly unlikely that laptop is still being used. Computer Equipment is not such a big red flag.

Navigating a business personal property audit can be daunting, but keeping bookkeeping and documentation in order can reduce stress in the event of an audit. Need help checking whether your documents are in order? Schedule a call with one of our bookkeepers or CFOs.