Battling city hall

Tax laws contain a number of unique tax breaks and routine
deductions to help every business reduce costs.
Photo: iStock.com/ lvcandy

Consider it the perfect Catch-22: Businesses are making less money and paying less in taxes at the same time costs are going up for governments at the state and local levels. Many states are raising taxes across the board – property, sales, income and excise – with more increases projected.

While that’s happening, technology also enables both state and local governments to better audit and more efficiently compare notes. In other words, enforcement is becoming more aggressive and more issue-focused.

Attempting to prevent local, state or even federal lawmakers from increasing the amount of rules, regulations, fees and taxes that every aggregates operation must contend with is often fruitless, and always expensive. Battling the city hall, county or statehouse over zoning issues, unfairly levied fines, property tax assessments and tax bills can be even more expensive.

Tilting at windmills

Fortunately, our tax laws contain a number of unique tax breaks and more routine deductions to help every business reduce the cost of those battles. While most quarries and sand-and-gravel pits are “grandfathered” or exempt from changes in zoning laws, zoning restrictions can effectively slow plans for expansion, seriously erode the operation’s customer base and otherwise create an impact on the business’ bottom line.

Unfortunately, the U.S. Tax Court has denied a tax deduction for a decrease in property value resulting from government restrictions or zoning laws. Adding insult to injury, the cost of challenging zoning laws must be capitalized rather than deducted as an immediate expense.

Potentially even more painful are the “eminent domain” laws that are increasingly being used to take property away from owners. While any gain that results is taxable, an aggregates business does not recognize the gain after involuntary conversions such as theft, destruction or condemnation, so long as the converted property is replaced with property that is similar to the property that was lost or taken.

Fighting ‘improvement’ taxes: Any tax that is, in reality, an assessment for local benefits such as streets, sidewalks and similar improvements is not deductible by the property owner – except where it is levied for the purpose of maintenance and repair or of meeting interest charges on local benefits. According to the tax rules, it is up to the taxpayer to show an allocation of amounts assessed for different purposes.

Barrier removal: This is good news for any aggregates business making their premises more accessible either voluntarily or at the urging of lawmakers. A business can choose to deduct up to $15,000 of the cost of removing architectural and transportation barriers for handicapped or elderly people, be it workers or customers, instead of capitalizing or depreciating such costs.

The cost of lobbying

No longer is there a tax deduction for attempts to inform, educate or influence lawmakers. That’s right, no longer is the cost of lobbying to promote, to defeat legislation or to influence the public about the desirability or undesirability of proposed legislation deductible as a business expense, even though the legislation may affect the aggregates business.

Fortunately, this prohibition does not apply to in-house expenses that don’t exceed $2,000 for a tax year. Lobbying expenses pertaining to local legislation are, of course, deductible.

Write-offs for licenses 
and other intangibles

When it comes to those irksome licenses, permits and other business necessities, many fall within the category of “intangible assets.” Because neither a value nor a predicted “life” can be placed on most intangible assets – or the expense of negotiating for them – they are rarely tax deductible. Section 197, a unique write-off for “intangible” assets “acquired” by an aggregates business allows the cost of those intangible assets to be deducted or amortized over a 15-year period.
Among the Section 197 intangible assets are the following:

(A) Goodwill
(B) Going concern value
(C) Any patent, copyright, formula, process, design, pattern, knowhow, format or other similar item
(D) Any license, permit or other right granted by a governmental unit or agency
(E) Any covenant not to compete (or other arrangement to the extent such arrangement has substantially the same effect as a covenant not to compete) entered into in connection with an acquisition (directly or indirectly) of an interest in a trade or business
(F) Any franchise, trademark or trade name

When any of the above are acquired, they may be written off or deducted as Section 197 assets over a 15-year period. Intangible assets that are not acquired, as mentioned, cannot be written off because they do not have a determinable “useful life.”

Legal expenses are generally immediately tax deductible, even if primarily for the purpose of preserving existing business reputation and goodwill. However, while the deductibility tests are substantially the same as those for other business expenses, they clearly preclude a current deduction for any legal expense incurred in the acquisition of capital assets – including zoning changes, leases and other intangible assets.

Fighting property taxes

Despite all of the attention focused on income taxes, it is the bill for the tax on the property owned – or leased by – many aggregates businesses that is the biggest expense and the most difficult to manage. According to the Council on State Taxation, a Washington, D.C., think-tank, American businesses shell out more on property taxes than for any other type of state or local taxes.

Because so many variables enter into the equation, it is rare that the assessor and the property owner agree on a value. Armed with a few facts about the property, battling city hall – or in this case the property tax assessor – offers the potential for major savings. Once reduced, the savings generally last year after year.

Across the line

All aggregate producers face an interesting challenge if they do business in more than one state. The state the aggregates operation calls home generally wants to tax every dollar of income. Every other state where you do business wants to tax income earned in their state.

Fortunately, only rarely does anyone wind up paying tax on the same income twice. “Rarely” is the operational word because the way states handle the problem is not uniform.

In other words, if you do 45 percent of your business in state A and 55 percent in your home state of B, that doesn’t mean that 45 percent of your operation’s income will be taxed in A and 55 percent in B. Depending on the rules in each state, the aggregates operation may wind up paying slightly more or less. In fact, depending on the rules in each state, the operation could wind up paying state tax on less than 100 percent of its income.

Tax hits

Taxes may be inevitable, but not deductions. This has recently become an issue as the courts weigh in on whether either an individual or a business can deduct the costs related to government enforcement actions. Federal tax laws allow for the deduction of “any loss sustained during the taxable year and not compensated for by insurance or otherwise.”

Another provision however, specifically excludes “any fine or similar penalty paid to a government for the violation of any law.” Criminal fines imposed by a court are clearly not deductible, but it is not so easy to categorize the treatment of orders requiring the forfeiture of the proceeds derived from criminal activity.

Of course, the tax code does not always follow the same logic as other areas of the law. The issue of taking a deduction for the costs of a settlement is much more important for large incorporated businesses, which have paid out billions of dollars in recent cases. There has been debate about whether the government effectively subsidizes those payments by allowing for a deduction from income when companies pay large civil settlements.

Taking advantage

While state and local governments have stepped up enforcement ordinances and regulations, many have been adding incentive programs to revitalize local economies. There are more than 1,200 separate state and local initiatives, including corporate, sales and property tax savings, as well as rebates and loans.

Despite tight budgets, most state initiative programs for promoting energy efficiency have survived. Best of all, some of these are taxable credits. That means an aggregates business with a state tax credit but no state tax liability can sell the credit to someone who can use it.

The increasing financial burden for aggregates operations trying to comply with the growing number of new regulations and the ever-more-expensive fines, penalties and even higher taxes is significant. While few government programs on any level come with provisions to help offset their cost, our tax laws remain as one avenue of potential savings, at least for aggregates producers who seek professional help when battling city hall.

Mark E. Battersby is a freelance writer who has specialized in taxes and finance for the last 25 years.