How to Evaluate Commercial Property
Tax rates, even within a state, are not universal! In Rhode Island, commercial mill rates or tax rates are different compared to the residential rates in some towns, but the same in others. The average residential property tax for the 39 municipalities in Rhode Island is 15.65 for residential property, but 19.60 for commercial property, but only 21 of the municipalities have a higher rate! Why is there this discrepancy? What do some towns provide that makes the mill rate different?
A higher commercial tax rate often reflects the higher level of services available within the area. But this might also reflect the degree of reliance on property tax within the municipality. Tax rates are higher within areas with higher assessed value for commercial property. For example, the urban core and urban ring municipalities typically have a higher tax rate (e.g., the average tax rate of 26.70 for the urban core municipalities, with Newport having a significantly lower tax rate within that group; average tax rate of 28.64 for the urban ring municipalities) and are the areas where commercial real estate tax rates are universally higher than residential property rates. Whereas within the suburban municipalities, the average tax rate is 17.11, with only 50% having higher rates for commercial properties, than residential properties. For rural municipalities, the average tax rate is 16.54, with 26.67% having higher rates for commercial properties than residential properties. The net assessed value for commercial property has the highest average in the urban core area, followed by the urban ring municipalities. The rural municipalities have the lowest net assessed value for commercial properties.
Once we have established the assessed value of the commercial property it will then need to be multiplied by a mill rate to determine the true value of this property. These mill rates are calculated on the basis of town services like, schools, water districts, roads, electrical grids, police, and other infrastructure. Each town varies in its services which explains why each mill rate is different from town to town. But towns may also value different aspects of a business, resulting in different calculations.
Similar to calculating the residential property tax, commercial property taxes are calculated from taking the assessed property value multiplied by the mill rate and then divided by 1,000.
For example, we have a commercial property in Warwick whose taxable value is $2,000,000 and the mill rate of the town of Warwick is $28.10. Therefore, to calculate the property taxes we will take $2,000,000*$28.10 to get $56,200,000 and divide by 1,000, resulting in property taxes of $56,200 for this year.
As noted by the Tax Foundation (taxfoundation.org), property taxes are often one of the largest sources of expense for a company. Commercial taxes can include real estate property tax, as well as personal property tax on equipment or furnishings owned by the company. Capital stock tax, which is typically based on the net worth of a corporation and is charged in addition to corporate income tax, was eliminated by Rhode Island in 2015. In contrast, Massachusetts and Connecticut have one of the highest rates of capital stock tax, although it is in the process of being phased out in Connecticut. The Tax Foundation’s State Business Tax Climate Index ranked Rhode Island’s commercial tax rate as being better than Maine, Vermont, New Hampshire, Massachusetts, and Connecticut.
Although commercial properties may be subject to more tax, they may also have additional options to help offset this cost. There are 3 basic benefits that can help reduce these commercial property taxes and allow for your business to hold on to more money. First, interest expense, the interest you pay on your commercial mortgage loan, qualifies for a tax reduction and can be written off to help reduce tax expense if the interest payment was made the year of filing. Secondly, depreciation expense or depreciation of your property, can be leveraged as a tax deduction as well lowering your liability. Thirdly and lastly, non-mortgage related expenses can be written off as tax deductions. These out-of-pocket expenses will not only improve and increase the value of your property but most of them, for example, renovations, maintenance, curb appeal upgrades, etc., can qualify for specific tax deductions as well.
Although commercial properties will be assessed at a higher value, if you can leverage and understand your state’s tax codes, as well as federal tax codes, you can lower those rates and spend less in property taxes annually.
Posted by Nolan Trask on
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