How to Report a Fixed Asset
Fixed assets, such as the major investments made in your business such as vehicles and equipment, have complex reporting requirements. Real estate is also a fixed asset whether you’re a professional real estate investor or an accidental landlord who decides to rent out your old place when your life takes you elsewhere. Even your own car that you use for both getting around and making money is considered a fixed asset, if you’ve been using it for casual income like ride-sharing.
If you’ve been doing your taxes yourself, suddenly having to report fixed assets can be incredibly confusing. The more fixed assets you use in your business, the more complex your tax and financial situation becomes. A tax professional can help you determine the best course of action for when you should invest in new fixed assets and how to properly report them, but here are the basics that you need to know when it comes to reporting fixed assets.
Depreciation on the Books vs. Your Tax Return
Writing off the value of your fixed assets over time is referred to as depreciation. However, the amount of depreciation that goes on your tax return is often wildly different than the depreciation that gets reported on your financial statements. This is because of tax incentives meant to encourage business owners to buy fixed assets, in addition to the different conventions that apply to different types of fixed assets.
Because of this, you can’t simply take the values recorded in your bookkeeping software and transpose them onto your tax return. This is especially important for fixed assets with highly personal elements like cars, homes, and computers. You not only need to record the personal and business percentages but also depreciation according to that percent.
Date Placed in Service vs. Date of Purchase
Unlike a simpler purchase such as office supplies where the purchase date is used to determine when you deduct the item, the date the fixed asset is placed into service is the one used. Because depreciation would start on that date and not necessarily the date of purchase, it can significantly impact the way depreciation gets reported on your tax return.
Depending on what type of business you have, the date the item is placed into service will be the same date as the purchase date. In the event the two dates are different, they must be noted.
You May Have to Depreciate Certain Leases and Leasehold Improvements
Generally, you deduct rented space and equipment as a rental expense. But there are cases where you need to report your leased fixed assets just like you would if you own them. This is true if your leased equipment is under a capital lease (opposed to an operating lease) with buyout option at the end of its life, or you made significant improvements to the space that you rent for your business. The latter is called a leasehold improvement and it is treated as an asset that you own instead of an expense for tax purposes.
Sale or Disposition of Fixed Assets
When you sell a fixed asset, you need to report the sale on your tax return in addition other factors. This entails having correct calculations of the depreciation recorded for both books and tax purposes as well as the purchase price and sale price. The same is true if you dispose of an asset because it stopped working or you’re upgrading. There may also be a recapture in the event that your fixed asset sells for much more than what the accumulated depreciation you previously deducted was (this is more common for real estate, less so for vehicles and equipment.)
Rue & Associates can assist you with keeping track of your fixed assets properly. This not only ensures that the correct amounts are reported on your tax return, but also that your financial reporting, budgeting, and asset values will be more accurate. This will help you value your business, get an investor or a loan, or have these numbers handy for insurance purposes. Give us a call today to speak to one of our friendly and professional tax professionals.