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Legislation proposes significant change to valuation of business personal property and machinery and tools

HB 1402 (March) proposes a major departure from longstanding tax policy by requiring tangible personal property that is employed in a trade or business, and machinery and tools, to be valued according to the federal Modified Accelerated Cost Recovery System (MACRS), which is a method of recovering the costs of business or income-producing property through deductions for depreciation on federal income taxes.  VACo opposes this legislation.

The Virginia Constitution requires real and personal property to be assessed at fair market value (Article X, Section 2).  Under Virginia Code § 58.1-3503, tangible personal property must be valued by a method that “may reasonably be expected to determine actual fair market value as determined by the commissioner of the revenue or other assessing official.”  A commissioner shall, upon request, take into account the condition of the property, which includes technological obsolescence, where technological obsolescence is an appropriate factor for valuing such property.  Tangible personal property used in business is required to be valued as a percentage of original cost, unless the property valuation methodology is otherwise specified in § 58.1-3503 (for example, trucks of less than two tons may be valued by means of a recognized pricing guide, if the model and year are listed in the guide).

Virginia Code § 58.1-3507 requires machinery and tools to be valued by means of depreciated cost or a percentage or percentages of original total capitalized cost excluding capitalized interest.  The commissioner of the revenue must consider any bona fide, independent appraisal presented by the taxpayer upon written request.

Under MACRS, there are two systems for the calculation of depreciation deductions:  the General Depreciation System and the Alternative Depreciation System.  The General Depreciation System (GDS) is usually required unless a taxpayer is required to use the Alternative Depreciation System (ADS) (a taxpayer may also elect to use ADS).

Under GDS, property is broken into nine classifications, with different depreciation timeframes for each class.  Three depreciation methods are allowed under GDS, depending on the type of property being depreciated; two of these methods record larger depreciation during the earlier years of an asset’s useful life and smaller depreciation during the asset’s later years, and the third assumes depreciation at a steady rate over the asset’s useful life.

HB 1402 has been referred to the House Finance Committee.

Key Points

  • Changing to MACRS from the current locally-administered system would tie Virginia’s local tax structure to future decisions made at the federal level regarding the treatment of depreciation under the Internal Revenue Code.
  • Under MACRS, once property is fully depreciated, it is considered to have no value. Current assessment practices recognize that older property retains residual fair market value.  If that value is no longer considered part of the local tax base, localities will have to turn to other sources to raise revenue, thus shifting the tax burden from businesses to other taxpayers.
  • Some businesses will have larger amounts of property that qualifies for expedited depreciation under MACRS (by qualifying for the General Depreciation System) than others. As HB 1402 recognizes, not all machinery and tools and business personal property qualify for MACRS depreciation, in which case some property would still be valued under current rules for determining fair market value.
  • Changing to MACRS will be administratively complex. Businesses would have to separate their property by the IRS’s year classification system.  Several localities participating in the Commission on Local Government’s fiscal impact statement process identified a need for additional staff or IT improvements to administer tax collections under this methodology.

VACo Contact:  Katie Boyle

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