What's Eligible to be Deducted as Personal Property TaxThe tax code defines personal property tax pretty simply. "The term 'personal property tax' means an ad valorem tax which is imposed on an annual basis in respect of personal property." (Internal Revenue Code section 164(b)(1)).
Treasury Regulations spell out three criteria for being able to deduct personal property taxes. (1) The tax must be an ad valorem tax based on the value of the property. (2) The tax must be imposed annually. (3) The tax must be imposed on personal property. (Treasury Regulations 1.164-3(c))
A Portion of Vehicle Registration Fees Could be Deducted as Personal Property TaxIf a fee, such as a vehicle registration fee, is based partly on the value of the property and partly on other factors, then the portion based on the value of the property can be deducted. In Publication 17 the IRS advises, "A tax ... can be considered charged on personal property even if it is for the exercise of a privilege. For example, a yearly tax based on value qualifies as a personal property tax even if it is called a registration fee and is for the privilege of registering motor vehicles or using them on the highways. If the tax is partly based on value and partly based on other criteria, it may qualify in part." (From Publication 17, chapter 22, section on Personal Property Taxes)
The IRS gives the following example of how to deduct the personal property tax portion of a vehicle registration fee:
"Your state charges a yearly motor vehicle registration tax of 1% of value plus 50 cents per hundredweight. You paid $32 based on the value ($1,500) and weight (3,400 lbs.) of your car. You can deduct $15 (1% × $1,500) as a personal property tax because it is based on the value. The remaining $17 ($.50 × 34), based on the weight, is not deductible."
(From Publication 17, chapter 22, section on Personal Property Taxes)
Personal Property Taxes on Business EquipmentIf personal property is used in a trade or business, then personal property tax paid on that equipment can be deducted as a business expense. Some local governments assess personal property taxes on equipment and furniture used in a business. This would be deducted on the tax return for that business. For sole proprietors, such taxes would be deducted on their Schedule C. The IRS advises, "Personal property tax. You can deduct on Schedule C or C-EZ any tax imposed by a state or local government on personal property used in your business. You can also deduct registration fees for the right to use property within a state or local area." (Publication 334, Tax Guide for Small Businesses, section on Taxes)
If personal property is used partly for business and partly for personal use, then the business portion is deducted as a business expense and the remainder as a personal deduction on Schedule A. The IRS gives the following example in Publication 334:
"May and Julius Winter drove their car 7,000 business miles out of a total of 10,000 miles. They had to pay $25 for their annual state license tags and $20 for their city registration sticker. They also paid $235 in city personal property tax on the car, for a total of $280. They are claiming their actual car expenses. Because they used the car 70% for business, they can deduct 70% of the $280, or $196, as a business expense."
RecordkeepingKeep any documents that specify how much personal property tax you paid during the year. For example, this might be an annual vehicle registration statement. The vehicle registration statement may indicate what portion of the registration fee qualifies to be deducted as personal property tax.
Impact of the Alternative Minimum TaxThe deduction for personal property taxes is an adjustment item for calculating the alternative minimum tax (AMT). What this means is that personal property taxes are deductible when calculating the regular federal income tax, but not deductible when calculating the AMT. People who are impacted by the AMT will obtain little or no reduction in their federal tax liability by using the personal property tax deduction.
- Internal Revenue Code section 164
- Treasury Regulations 1.164-3(c)
- Publication 17, chapter 22, section on Personal Property Taxes
- Tax Topic 503, Deductible Taxes
- Schedule A [pdf]
- Instructions for Schedule A, Line 7
Created July 31, 2013