financialtreat – will explain about the 7 Facts You Should Know About Business Assets that you will get in the following article. let’s look at this article carefully!
Business assets, or, as the IRS calls them, “property,” are items of value owne by a business. Assets come in several types, from cash to land and buildings. Every business needs assets to operate; without assets like furniture, machinery, or vehicles, you can’t run your business. Here are 10 things every business owner needs to know about assets.
1) Assets Can Be Tangible or Intangible
The two broadest categories of business Asset are those that are tangible and those that are not. Assets can be real, or tangible, like a car or a computer you use for business, or retail shelving. They can also be intangible, like intellectual property (trademarks, copyrights, patents).
One interesting asset is your business’s goodwill. It’s your good reputation, sometimes expressed in the value of your loyal customers. Goodwill is generally calculated as the difference between the purchase price of a company and its fair market value.
2) Assets Are Treated Differently for Tax and Accounting Purposes For Accounting Purposes
You business assets are shown on the business balance sheet. The assets are listed 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. Cash is listed first as the most liquid asset, then other current assets, and then fixed assets.
Current assets, including cash, accounts receivable, and inventory, are most quickly converted to cash. Fixed assets, like property and buildings, are less liquid and less easily converted to cash.
For Tax Purposes
The IRS distinguishes between assets (property) depending on whether or not they can be expense or depreciate.
Expensing an asset means taking the tax deduction for it in the first year after you buy it. The cost of current assets and low-cost fixe assets are usually expense. For example, you can take the entire cost of a cell phone in the first year.
Depreciation is an annual deduction from your business taxes to recover the cost of an asset over a certain number of years (the asset’s useful life).
You can depreciate tangible property and some intangible property, like patents, copyrights, and computer software, if:
- You own the asset
- You use it for business purposes
- It has a useful life that can be determine, and
- It must be expecte to last for more than one year.
Real property (land and buildings) cannot be depreciate, while personal property can be depreciate. The process of figuring out how to depreciate assets is calle depreciation.
Liste property is a special kind of business asset. These are assets that can be use for both personal and business purposes, so the IRS keeps a close eye on them.
Types of liste property:
- Passenger autos,
- Other property use for transportation, and
- Property use for entertainment, recreation, and amusement (including cameras and recording devices).
The IRS has detaile limits and rules about deducting and depreciating business property, including recovery periods (useful life) of different kinds of assets and different depreciation methods. See IRS Publication 946 How to Depreciate Property for more information.
3) Some Assets Are Depreciate; Others Are Amortize
As note above, some assets can be depreciate; these are calle 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 accelerate depreciation can bring tax benefits.
Some assets must be amortize, which is similar to depreciation for certain kinds of intangible assets. Many intangibles are amortize over a 15-year period with no salvage value at the end of this period.
4) Assets Are Value Differently, and Values Change
Fair Market Value: The most common way to value individual assets is by determining their fair market value (FMV). This value is the price an asset brings in a sale between a willing buyer and willing seller, neither of them compelle to buy or sell.
Appraisal: Some assets can be value by a specialist calle an appraiser, creating an appraise value for the purpose of using the asset as collateral or to substantiate depreciation deductions. Artwork, jewelry, stock, and buildings are examples of assets that might be appraise.
Liquidation: Liquidation of assets is the process of getting cash for them during a bankruptcy. The liquidation value is considere as cash value, and it’s considerably less than the fair market value because the seller is usually being force to sell.
Obsolescence: Business asset values can change with age and obsolescence, or just with market conditions. An asset is obsolete if it isn’t use anymore (like old machinery you can’t get parts for) or has been replace by something newer and better or more fashionable.
Disaster: The IRS sets specific rules for claiming the value of assets for disaster loss purposes. For this purpose, you’ll need to value your business assets before and immediately after the disaster.
5) It Doesn’t Matter How You Buy the Asset
The value of an asset on your business accounting system isn’t relate to the way the asset was purchase. For example, an asset like a company vehicle that is purchase with cash is value and depreciate the same as a vehicle purchase with a loan.
6) You Must Use the Asset if You Want to Deduct or Depreciate the Cost
The IRS requires that you place the asset in service to claim expenses and depreciation deductions. “Place in service” means the time that the asset is ready and available for a specific use, even if you aren’t using it yet. For example, if you buy a computer in Year 1, but you don’t install it and make it operational until Year 2, you can’t begin to depreciate the computer until Year 2.
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7) Gains on the Sale of Assets Are Capital Gains
If you sell certain assets (calle “capital assets”) for a profit, you must pay capital gains tax on that profit. Most business property is considere a capital asset, including furniture, stocks and bonds, vehicles, and buildings. Assets that are not capital assets include:
- Items in inventory for sale to customers
- Accounts or notes receivable
- Depreciable property
- Real estate
- Patents, trade secrets, copyrights, and similar items.
If the asset was sold within 12 months of purchase, the capital gain is short-term; otherwise, you must pay the long-term capital gains rate.
In order to calculate the gain or loss on the sale of an asset, you must first get the basis (original cost) of the item. The basis includes all costs involve with the purchase of the item, including commissions, fees, setup, and training on the item’s use.
Capital gains are taxe at a different rate than other types of income. The tax rate depends on the owner’s income. For most taxpayers, the rate will be up to 15%. Thus the article about 7 Facts You Should Know About Business Assets. Hopefully it will be useful for you and that’s all thanks.