This Subtopic addresses the accounting for real and personal property taxes, specifically, when to record the tax liability and the amounts to be charged to income in future periods.
The guidance in this Subtopic applies to all entities.
The legal liability for property taxes must be considered when title to property is transferred during the taxable year. Adjustments on account of property taxes paid or accrued are frequently incorporated in agreements covering the sale of real estate, which determine the question for the individual case as between the buyer and seller.
The decision is influenced by the particular circumstances of each tax. Such terms as assessment date and levy date vary in meaning in different jurisdictions.
Determination of the liability for the tax often proceeds by degrees, with several steps being taken at appreciable time intervals. For example, while it is known that the owner of real property is liable, with respect to each tax period, for a tax on property owned on the assessment date, the amount of the tax may not be fixed until much later.
The inability to determine the exact amount of taxes is in itself no justification for failure to recognize an existing tax liability. All of the circumstances relating to a particular tax shall be considered before a satisfactory conclusion is reached.
Generally, the most acceptable basis of providing for property taxes is monthly accrual on the taxpayer's books during the fiscal period of the taxing authority for which the taxes are levied. The books will then show, at any closing date, the appropriate accrual or prepayment. The monthly accrual basis is practical and satisfactory so long as it is consistently followed.
Since the liability for property taxes must frequently be estimated at the balance-sheet date, it is often necessary to adjust the provision for taxes of a prior year when their amount has been ascertained. These adjustments should ordinarily be made through the income statement, either in combination with the current year's provision or as a separate item.
An accrued liability for real and personal property taxes, whether estimated or definitely known, shall be included among the current liabilities. Where estimates are subject to a substantial measure of uncertainty, the liability shall be described as estimated.
In condensed income statements appearing in published reports, the amounts of real and personal property taxes, however charged in the accounts, are rarely shown separately. They are frequently combined with other taxes but not with taxes on income.