Keeping complete and accurate asset records can save you money -- not to mention headaches -- at tax time. Your business's assets contribute to its value, and your asset records can play a critical role at tax time.
Purchases of equipment and other assets are tax-deductible, and you may realize a capital gain or loss when your business sells its assets.
You'll need certain information regarding these transactions to prepare your business tax return and you must be able to substantiate the information through records if the Internal Revenue Service questions your figures.
Asset Records for Purchases
- Receipts and bills of sale: These should show the total cost of the asset (called the asset's basis), including sales tax, delivery fees, setup expenses, and accessories.
- Description of the asset: Photographs can tweak your memory later.
- The date the asset was placed into service in your business.
- The percentage of use for business purposes versus personal use.
Asset Records for Sales
- The date of the sale.
- The sales price.
- Costs of any improvements to buildings (called leasehold improvements).
- Costs associated with the sale, such as broker fees or advertising expenses.
The Art of Depreciation
Asset records for purchases will allow you to determine depreciation schedules at tax time. Your recovery period -- the time over which you can recapture the cost of each asset -- will be three, five, or seven years, depending on the asset and its value.
If you spend $10,000 on a computer system, the recovery period is typically five years, so you would be entitled to deduct one-fifth of the cost each year during this time.
Some depreciation expense deductions can be accelerated (moved into earlier years). Some equipment is eligible for Section 179 deductions, and new equipment may be eligible for a 50 percent deduction (from bonus depreciation) in the first year with the remaining 50 percent spread out over the five year period.
Your accountant can advise you regarding when and how much of a depreciation deduction you can take if you provide him with comprehensive records of the purchase. You'll be able to provide the IRS with the basis of your deduction should it be called into question.
Capital Gains or Losses
Income your business generates is not considered a capital gain, including profits you realize from purchasing merchandise and subsequently reselling it. When you sell business assets and realize a profit, this income is subject to capital gains tax.
It's considered a short-term gain if you sell within a year, and this tax rate has the potential for being significantly higher than that for long-term capital gains. Capital losses that occur when your business sells an asset for less than its investment in it can result in a business tax credit.
Your asset records are crucial in both situations, establishing your investment and detailing the sales transaction. When in doubt, hang onto that paperwork. The alternative might cost you thousands of dollars, not only in lost deductions and increased taxes but in tax preparation fees