10 Facts You Should Know About Business Assets
Depreciating Assets, Keeping Asset Records, Valuing Assets, Selling Assets
Business assets, or as the IRS calls them, "property," are items of value owned by a business.
Assets Are Classified Differently, Depending on How You Look at Them, or Who Is Looking at Them
The two broadest categories of business assets are assets that are tangible and those that are not. Assets can be real, or tangible, like a business car or a piece of equipment. They can also be intangible, like intellectual property (trademarks, copyrights, patents) or goodwill.
For Accounting Purposes
Assets are shown on the business balance sheet. Assets are categorized according to their liquidity, which is a term relating to the ease of transferring the asset to cash because cash is the most "liquid" asset. Current assets, including receivables (amounts owed to the business) and inventory, are most quickly converted to cash. Long-term assets, like property and buildings, are less liquid and less easily converted to cash.
For Tax Purposes
The IRS distinguishes between assets depending on whether or not they can be depreciated. That is if the cost of the asset can be spread out over time. Real property (land and buildings) cannot be depreciated, while personal property can be depreciated. The process of figuring out how to depreciate assets is called depreciation.
For Tax Purposes on Sale of Assets
The IRS taxes the gain on the sale as a capital gain, which can be either short-term (if the asset is held a year or less), or long-term.
Business Assets Are Valued Differently, and Values Change
All business assets have value, but each type of business asset is valued differently, and value can change, based on the circumstances. Assets have different values, depending on how and when sold. The value of an asset that is in service can be determined by an appraiser, creating an appraised value for the purpose of using the asset as collateral or to substantiate depreciation deductions.
If assets are liquidated (sold in a bankruptcy, for example), the liquidation value is considerably less than the value if sold to settle debts. In another example, the IRS sets specific rules for claiming the value of assets for disaster loss purposes.
Business asset values can change with age and obsolescence, or just with market conditions. The fair market value is the most common method of valuing assets. Business assets are often appraised to determine their value.
It Doesn't Matter How You Buy the Asset
Value or depreciation of an asset is not related to the way the asset was purchased. For example, an asset like a company vehicle that is purchased with cash is valued and depreciated the same as an asset purchased with a loan.
Some Assets Can Be Depreciated
As noted above, some assets can be depreciated; these are called depreciable assets Depreciation of assets is an important bookkeeping and tax concept, because depreciation is an expense that can lower the value of an asset and accelerated depreciation can bring tax benefits.
It's Important to Keep Excellent Records of Business Assets
It's important to keep excellent records of business assets, starting with the purchase of the asset.
Include all information on asset costs, on depreciation, on salvage value, repairs and maintenance, and any appraisals of the asset.
You Must Use the Asset to Claim Depreciation and Expenses
The IRS requires that you place the asset "in service" to claim expenses and depreciation deductions. A recent Tax Court opinion (T.C. Memo 2011-214) detailed that "placed in service" means the time that property (that is, an asset) is first placed by the taxpayer in a condition or state of readiness and availability for a specifically assigned function," as in a trade or business or for the production of income. In another Tax Court case (T.C. Memo 2013-275), a business owner used an asset once, on December 30, then not again until January until some major renovations were made. The Court ruled that the assets were not available for regular use until the renovations were made.
Thus, it was not fully in service until January.
Gains on Asset Sales Are Taxable as Capital Gains
If you sell certain assets (called "capital assets") for a profit, you must pay capital gains tax on that profit, which is another reason for keeping excellent records on asset costs so that you can lower the profit. If the asset was sold within 18 months of purchase, the capital gain is short-term; otherwise, you must pay the long-term capital gains rate. Read more about capital gains, including capital gains tax rates.
Some Assets Can Be Capitalized
You can capitalize an asset by turning it from an expense into an asset. For example, some start-up costs are considered long-term costs and can be capitalized. This spreads the expense over more than one year.
Assets Can Be Used as Collateral for a Business Loan
If you are asked to put up an asset as security for a business loan, a lien is put against the asset. The lien gives the lien holder first right to the asset and requires the loan to be paid off before you can sell the asset and get your money from it.
Asset Ratios Can Be Used to Show Company Profitability
How a company uses its assets to generate income can show its profitability. A financial ratio called net return on assets is a good measure of how the company puts its assets to work.