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Tax Season | 2 min read

What The Heck Is Functional Obsolescence and How Does It Impact My Property Taxes?

Did you know that it’s been almost 50 years since the first handheld cellular phone was made by Motorola? Back then, who walking around holding a two and a half pound phone could have imagined the world of smartphones, apps, and internet-based technology we enjoy today?

We have experienced revolutionary advancements in technology this century. Whether it’s in telecommunications, semiconductors and computers, software, IT, cloud computing, or energy, the modern business environment runs on complex tech that is constantly evolving.

The continual development of new technologies could have a big impact on your property taxes. In this blog post, we’ll take a deep dive into functional obsolescence and let you know how it could be the key to big savings for your business.

What the Heck is Functional Obsolescence?

The ever-changing novelty we observe in technology can lead to obsolescence of an asset. The American Society of Appraisers defines “functional obsolescence” as the loss in value within the property as a result of the development of new technology. This includes such things as changes in design, materials, or processes resulting in overcapacity, inadequacy, lack of utility, or excess variable operating costs.

How Does it Impact My Property Taxes?

Unfortunately, when it comes to filing renditions, the deck is stacked against business owners. First, many filing forms ask for the historical cost when new, instead of the “good faith estimate” of value. This involves exerting additional effort and obtaining substantial supporting documentation.

Secondly, a CPA or internal tax team may not have extensive training or experience with the property tax code and associated property tax laws—especially if their business assets are in multiple counties and states.

What Can I Do About It?

To remain compliant, the most common approach to value is based on the cost method. Under the cost valuation approach, appraisal offices apply a straight line depreciation schedule to technology assets. This does not take into consideration the high rate of functional and economic obsolescence, which can result in a substantially higher tax rate.

After adjusting for any potential physical depreciation, the appraiser must consider the remaining obsolescence affecting the property, specifically functional and economic obsolescence. Producing these numbers is time-consuming, requires meticulous effort, and demands in-depth research. However, the benefit and resulting savings could be tremendous for your business.

For example, SWBC Ad Valorem Tax Advisors recently achieved close to $1 million dollars in tax savings for a large semiconductor company over a two-year appeal by implementing this approach. We have also produced similar results for companies in the solar, maritime, and oil and gas industries—resulting in millions of dollars in property tax savings.

With over 35 years of experience partnering with companies of all sizes to help manage and mitigate annual property taxes, we have the experience and knowledge to help uncover every stone for property tax savings opportunities.

If your company is looking for ways to increase your bottom line, visit our website for a no-obligation analysis of your current program.

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Gary Rivas

Gary Rivas is a Texas licensed Senior Property Tax Consultant experienced in providing Industrial, Commercial, and Residential property tax reduction advisory services for real and personal property in Texas and multiple states across the country. He has 31 years of experience in the Property Tax Profession with 27 years as a Property Tax Consultant, and 34 years as a licensed Texas Real Estate Agent.

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