Unclaimed property is a taxable facet of business that is lesser known and frequently overlooked. As a staple in the tax world, it is important to understand exactly what unclaimed property is and the accompanying tax implications.
What is unclaimed property?
The first step to understanding how taxes associated with unclaimed property work is being able to identify this type of property.
Typically, unclaimed property is some form of money that is owed to an entity but has not been received or claimed by that entity. This includes things like payroll checks, uncashed checks, vendor checks, insurance policies, gift cards, and customer refunds.
By itself, unclaimed property is not a tax, but it is frequently associated with state and local tax (SALT) because it is reportable or claimable in every state. As a result, working with unclaimed property usually falls on the shoulders of a SALT worker.
What makes unclaimed property complicated?
Understanding when to appropriately report unclaimed property can be a confusing process. As it encapsulates a wide range of property and accruals, the holder has different time ranges to report taxes. Payroll checks are usually closed within a year, while insurance policies can span multiple years.
On top of that, the holder is required to identify the actual owner of the property. Unclaimed property comes in many forms, which means proper documentation and transaction accounting becomes an emphasis.
Why is unclaimed property important to track and report correctly?
States usually have prescribed timelines for reporting unclaimed property, and this varies from state to state. If a business cannot locate the correct owner and transfer the funds in time, states can initiate an audit to make an estimate of the amount of unclaimed property that business holds and tax on that estimate.
These audits can be ugly. States are trying to generate revenue, and they can cover 10 or more years. This estimate will generally be leaning towards an overestimate, which can be a large unnecessary cost.
How can you start properly reporting unclaimed property?
Holders of unclaimed property can look to unclaimed.org for some guiding advice. This website holds a plethora of information about how to report unclaimed property and provides a variety of links to further help your learning process.
On the receiving end, businesses that are owed money can use missingmoney.com to help them find the amount of money they are owed and by when. You will need to fill out a claim form with documentation and possibly notary signatures to prove you are the actual owner of the account, but then you will get your money back.
Unclaimed property can be a difficult component of SALT and other tax avenues, but just like with other tax-related topics, it is important to understand and report correctly.
For more guidance, reach out to the tax professionals at taxops.com.