One of the largest capital investments many companies have is their investment in their property, plant, and equipment account. So when it comes to managing your company’s fixed assets, you want to be sure you are doing it correctly. Mismanagement can prove costly. There is the risk of missed opportunities for lucrative tax deductions, as well as the possibility of IRS penalties and interest’s being assessed. In addition, it can cause you to have to restate your financial statements. You can avoid all this, but it takes a bit of planning and a fundamental knowledge of fixed assets management.
What is a Fixed Asset?
Starting with the basics, you must first understand what a fixed asset is. When there is an expenditure for an item, you need to know if you can immediately expense it or whether you are required to capitalize (and maybe depreciate) it. While at times it may seem obvious, it isn’t always so.
A fixed asset is durable in nature and has physical substance. It is acquired by a business for use in its operations and is not held for resale. Most importantly, it must be able to be of service for more than one year (otherwise it is most likely an item that may be expensed). And finally, it usually may be depreciated. (An example of a fixed asset that cannot be depreciated is land.)
A principal difference between an item that may be expensed versus capitalized is the asset’s life expectancy. Any asset that is durable in nature and used in a business may be expensed in the year in which it is acquired if it will not last at least one year. Anything with a life of less than a year is not considered a fixed asset.
Managing Fixed Assets
When managing fixed assets, you have two concerns:
- You must follow Generally Accepted Accounting Principles (GAAP) for financial statement reporting, and
- You must follow the IRS tax codes and regulations for income tax reporting
Each has its own set of rules and requirements.
Income tax reporting is more complex than GAAP reporting because the IRS has many more specific rules about what you can and cannot do. GAAP requires the matching of income and expenses based on what makes the most economic sense, while the IRS requires that you follow the very detailed IRS code and its regulations. To be compliant with both, therefore, you need to know what the rules and regulations are.
What complicates income tax reporting even more, however, is that you have to keep different tax books for depreciating assets for different tax purposes. There are rules for regular tax reporting purposes, for Alternative Minimum Tax (AMT) and Adjusted Current Earnings (ACE), and even different requirements when calculating Earnings and Profits (E&P). In addition, you need to maintain a depreciation book for GAAP purposes. Add to this the various state income tax reporting rules, which may differ by state, and it becomes even more difficult, especially when a business is operating in several states.
To learn more about managing Fixed Assets check out this free e-book published by Sage Software, “Fixed Assets Management: What You Need to Know”. The e-book will give you a sufficient understanding of where to start and what you need to consider for effective fixed assets management. It will also provide you with a helpful list of best practices to follow. Although there are many more intricacies when it comes to income tax reporting, once you’ve mastered the basics, you will see that by following some basic best practices for fixed assets management, it is possible to do it well.
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