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The Impact of Eliminating Indiana’s 30% Depreciation Floor

January 24, 2022

Indiana Gov. Eric Holcomb made it clear that one of the top items on his 2022 legislative agenda was the reduction of Indiana’s business personal property tax – and the Indiana legislature has taken note. In mid-January, the Indiana House Ways and Means Committee passed its tax cut proposal, which would exempt the minimum tax on business personal property after Jan. 1 for new equipment purchased by businesses, otherwise known as the 30% depreciation floor. Last week, the proposal cleared the House and has been sent to the Senate for consideration. Whether or not similarly proposed Senate legislation successfully moves forward is yet to be seen*.

The application of the of the 30% depreciation floor has been the subject of much scrutiny and publicity in recent years. Current tax law states that a company or business cannot be assessed less than 30% of their original taxable cost on their taxable business personal property assets. This requirement applies to commercial property no matter what the depreciable life of the asset is. This increases the tax burden on thousands of Indiana businesses. Thus, businesses have pushed for Indiana to either reduce the 30% floor or eliminate it completely.

Indiana in Comparison

While other states impose floors on individual taxable assets, none are as high as Indiana’s 30%. Some states (12 to be exact) do not tax business personal property at all, including Indiana’s neighbors, Illinois and Ohio. Michigan has moved to an essential services assessment (ESA) for companies whose primary business is manufacturing.

What’s the Real Cost?

With the reduction or elimination of the 30% floor, it could result in a net loss to local government units in the tens of millions of dollars. This is a staggering figure, and it is one of the major reasons it has been so difficult to pass legislation reducing or eliminating the floor in years past. It’s important to note, however, that the House bill would eliminate the floor on new purchases made after Jan. 1, 2022, while the Senate bill would reduce the floor to 25% over a number of years. Thus, each bill would allow local governments the opportunity to offset those potential revenue losses over time.

Conversely, how much does this 30% floor cost Indiana businesses?

Sample scenario:

An Indiana company purchased a piece of machinery for $2,000,000 in 2005. Under current rules, a 2005 piece of machinery with a seven-year tax life would receive 85% depreciation (15% true tax value). The assessed value per the form would be $300,000. Assuming a 3% tax rate, the annual property tax on this piece of equipment would be $9,000.

With the current 30% floor in place, the assessed value of this 2005 piece of machinery with a seven-year life would be $600,000. Again, assuming the same 3% tax rate, the annual property tax with the 30% floor in place would be $18,000.

In the above scenario, the company is paying $9,000 more per year because of the 30% floor currently imposed. The elimination or reduction of this floor would free up capital for the company, enabling it to invest elsewhere.

This issue will continue to be debated and closely watched by lobbyists, local governments, and businesses alike throughout the legislative session. KSM will continue to monitor activity and report any significant changes in its annual Indiana Legislative Update, published after session concludes.

*Senate Bill 378 is currently under consideration, which would increase the business personal property tax exemption and reduce the 30% floor over time.

Chad Miller Property Tax Practice Leader

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