In 2018, the Missouri Senate passed legislation (Senate Bill 768) allowing telecommunications companies a one-time election to assess communications property other than land and buildings using a calculation method based on federal depreciation rates. Property such as fiber, circuit equipment and other communications property would be assigned a market value on a net depreciated basis using federal Modified Accelerated Cost Recovery System (MACRS) depreciation rates.
The current system uses a four-step method to calculate a market value of property. Income, market, cost and adjusted cost methods are calculated. Using these market value estimates, the State Tax Commission of Missouri assigns a subjective correlated estimate of market value (CEMV) using its expert judgment to establish a fair and supportable amount. From the CEMV, further adjustments are made for out-of-state property and values of locally assessed property. After these adjustments are made, the amount left is considered distributable property for which the commission is responsible for calculating the assessed value.
After analyzing multiple Missouri companies and the methodology that would need to be used, it’s expected that most, if not all, companies will maintain the current system of assessment and not elect the MACRS option. In all cases we analyzed, the current assessment system resulted in significantly less assessed value than that of the MACRS system. The current system is expected to result in a more favorable outcome for the following reasons:
- In many cases we reviewed, the income method was the smallest of the four calculation methods. By shifting to the MACRS method, which is a modified version of the two cost factors, a higher weight is given to a typically higher cost factor than what the income factor is.
- The MACRS method uses a residual floor to calculate market value. For example, fiber cable has a 15-year MACRS life; however, the undepreciated basis will never go below 15 percent of the original cost. Under the current assessment method, there are no restrictions on net basis and an asset class could become fully depreciated.
- The legislation has what could be considered a “poison pill”—that even if the tax election looks beneficial, a school district will be informed of the loss of tax revenue from a telephone company and may impose a fee to that telephone company to make up the difference in lost revenues.
In an expected unique situation where a company does benefit from this one-time and permanent election, a Form 18TE should be filed with the State Tax Commission of Missouri with the annual reporting package. For more information, contact Todd or your trusted BKD advisor.