What Is Tangible Personal Property and How Is It Taxed?

What Is Tangible Personal Property?

Tangible personal property is a tax term describing personal property that can be felt or touched and physically relocated, such as furniture, office equipment, machinery, and livestock. It is always depreciated over either a five- or seven-year period using straight-line depreciation but is eligible for accelerated depreciation as well and is taxed in several countries, including large chunks of the U.S.

Understanding Tangible Personal Property

Tangible personal property is the opposite of real property, in a sense, as real property is immovable. It can also be touched—unlike intangible personal property.

Tangible personal property, or TPP as it is sometimes called, includes items such as furniture, machinery, cell phones, computers, and collectibles. Intangibles, on the other hand, consist of things that cannot be seen or touched like patents and copyrights.

Most states impose property taxes on tangible personal property. These are collected on top of the taxes applied to real property like land and buildings to help fund various services such as schools, roads, and emergency medical services. Tangible personal property taxes are regulated at the state level but are levied primarily by local governments. They can vary considerably by jurisdiction.

Some states don't charge a tangible personal property tax. And those that do may only apply it to certain items, such as personal property that is valued above a certain threshold or only used for business purposes.

How Tangible Personal Property Is Taxed

Tangible personal property can be subject to ad valorem taxes, meaning the amount of tax payable depends on each item's fair market value. In most states, a business that owned tangible property on January 1 must file a tax return form with the property appraisal office no later than April 1 in the same year.

The property appraiser places a value on the property, and the tax amount due is calculated by multiplying the property value by the tax rate set by the tax authorities in the state.

Some counties and cities require the filer to list all property on the tax form and to provide the fair market value and cost for each tangible property. In these cases, the county will also provide a valuation table that can be used to estimate the value of the property based on its age and useful life. Some states only apply a tax on tangible property in the year the property was purchased.

Deductions

Tangible personal property tax is paid by a landlord or company to its local government, but landlords or company owners can claim a deduction on federal income tax returns. To claim the deduction, the tax must only apply to personal property owned and bought for the business’ operation, be based on its fair market value, and be charged on an annual basis (as opposed to a one-time basis).

Tangible Personal Property vs. Intangible Property

Tangible assets are physical items that can be touched and seen, such as machinery, buildings, and inventory. These assets are typically used for a company's operations and are typically subject to depreciation over their useful life. Think of some machinery that is physically used that breaks down and needs fixing.

Intangible assets, on the other hand, lack physical substance but have value due to their legal or economic benefits. Examples of intangible assets include patents, trademarks, copyrights, and goodwill. These types of assets may lose value, but they generally don't depreciate. Instead, for tax purposes, intangible assets are generally amortized over their useful life or a statutory period defined by the IRS, usually 15 years for most intangibles. Amortization allows businesses to deduct the cost of these assets over time, similar to depreciation for tangible assets, thereby reducing taxable income gradually.

The distinction between tangible and intangible assets is a part of the tax code as there is different tax treatment. Tangible assets are often subject to different tax rules and recovery periods compared to intangible assets. Additionally, the initial cost basis, which is the starting point for depreciation or amortization, can vary depending on whether the asset was purchased, produced, or acquired through other means. Properly categorizing assets ensures compliance with tax laws and maximizes allowable deductions.

Tax regulations can also impose specific rules for the capitalization of costs associated with acquiring or creating both types of assets. For tangible assets, costs such as installation, transportation, and testing may be capitalized, while for intangible assets, legal fees, registration costs, and other expenditures directly related to securing the intangible property are included in the asset's basis. All of this is to say that the distinction between tangible personal property and intangible property does matter in the eyes of the IRS.

Example of How Tangible Personal Property Is Taxed

In Florida, anyone who has a proprietorship, partnership, or corporation; is a self-employed agent or contractor; or leases, lends, or rents property and owned tangible personal property on Jan. 1, must complete Form DR-405 and submit it to their local property appraiser by April 1.

If the tangible personal property is valued above $25,000, the entity or person will start paying tax on it. The property appraisal office will usually mail a letter to the company notifying it to file taxes on its property. If the company or landlord believes the letter is not applicable, they can return the letter to the office along with another letter explaining why taxes on tangible personal property do not apply to the business.

Where Is Tangible Personal Property Not Taxed?

Seven states exempt all tangible personal property from taxation. They are:

• Delaware  
• Hawaii 
• Illinois 
• Iowa 
• New York 
• Pennsylvania 
• South Dakota

Moreover, other states exempt most tangible personal property from taxation. They include:

• New Hampshire 
• New Jersey 
• North Dakota  
• Ohio

Resistance against a tangible personal property tax appears to be growing. According to MultiState, a state and local government relations company, 23 states sought to reduce or eliminate taxes on tangible personal property.

The tax has been described as complex, costly to administer, and guilty of pushing businesses to set up shop in other states with friendlier rates.

Tangible Personal Property and Depreciation

Tangible personal property is typically depreciated over its useful life. The IRS provides guidelines for different classes of property under the Modified Accelerated Cost Recovery System (MACRS). This system outlines specific depreciation methods and recovery periods depending on the type of asset:

• 5-Year Property: Includes computers, office equipment, cars, and trucks.
• 7-Year Property: Includes office furniture and fixtures.
• 10-Year Property: Includes certain agricultural machinery.

The most commonly used depreciation methods under MACRS are the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). GDS usually provides faster depreciation through methods like the double-declining balance, while ADS offers a longer recovery period with a straight-line method, often used for tax-exempt and foreign-use property.

Section 179 Expensing

Section 179 of the IRS Code allows businesses to expense the full purchase price of qualifying tangible personal property in the year it is placed in service, rather than capitalizing and depreciating it over time. For tax year 2023, the maximum deduction limit is $1,160,000, with a phase-out threshold of $2,890,000. This provision is designed to encourage businesses to invest in new equipment by providing immediate tax relief.

To qualify for Section 179 expensing, the property must be tangible personal property acquired for use in a trade or business, newly purchased (not acquired from a related party or through a gift or inheritance), and placed in service during the tax year.

Bonus Depreciation

Bonus depreciation allows businesses to deduct a significant percentage of the cost of qualifying property in the year it is placed in service. As of the Tax Cuts and Jobs Act of 2017, businesses can take 100% bonus depreciation on new and used tangible personal property acquired and placed in service after September 27, 2017, and before January 1, 2023. Note that this provision phases down by 20% each year starting in 2023, with no bonus depreciation available after 2026 unless Congress extends it.

The Bottom Line

Tangible personal property, or TPP as it is often called, is personal property that can be felt or touched and physically relocated. That covers a lot of stuff, including equipment, livestock, and jewelry.

In many states, these items are subject to ad valorem taxes. How tangible personal property is taxed can vary considerably, not just by state but also by city. Some places rely heavily on this tax, whereas others have completely banned it or offer various exemptions.