This article answers five common questions about how business assets affect your business taxes, with information about depreciation, capital gains, and how to value assets.
What Are Business Assets?
Business assets are anything of value owned by a business. Different types of business assets include cash, receivables, inventory, furniture, equipment, and real property (land and buildings). Business assets may be tangible (with physical form, like a piece of equipment) or intangible (with no form, like a copyright or patent). For tax and accounting purposes, assets are divided into several categories for different purposes:
Short-term assets, used up within a year, like office supplies Long-term assets, used over several years, like office furniture, equipment, and vehicles
How Does Depreciation Affect Business Assets?
You can deduct the cost of some business assets by spreading out the cost over time, using a process called depreciation. Typical assets that can be depreciated are vehicles, equipment, and furniture. Typical assets that can be depreciated are vehicles, equipment, and furniture. Understanding how depreciation works helps you make better business decisions on buying or selling assets. Only certain assets can be depreciated; they must:
Be owned by your businessUsed to produce business incomeHave a set useful life
Accelerated Depreciation
The tax laws give some incentives to business owners to buy assets by allowing them to accelerate (speed up) deductions for business assets. A section 179 deduction allows a business to recover all or part of the cost of qualifying assets in the first year the asset is bought and used. Bonus depreciation allows an additional 100% deduction for certain types of assets in their first year of use.
How Does the Sale of Business Assets Affect Taxes?
In addition to depreciable assets, your business may have capital assets like land, buildings, and stock shares. Businesses use these assets for investment purposes. If you sell a capital asset for more than you paid for it, you have a capital gain, and you must pay capital gains tax on this gain. If you sell it for a loss, that’s a capital loss. How you calculate and pay capital gains taxes depends on whether the gain is short-term (held less than a year) or long-term (held for more than a year). Add up all the gains of both types to get a net capital gain for the year. How you enter capital gains on your tax return depends on your business type.
How Are the Value of Assets Determined During the Sale of a Business?
Selling a business may mean selling the business stock, or it might mean selling the business assets. The typical sale of a small business usually means selling off all the assets, with each asset value set for tax purposes. This means you must look at the sale of each asset to figure out how it will affect your tax situation:
Capital assets (investments) for capital gains or losses Depreciable property, like vehicles or equipment, for depreciation Real property (land and buildings) Inventory for ordinary gains or losses
How Do I Value Business Assets After a Disaster?
You may be able to deduct losses to your business from federally declared disasters in a tax year.. But you can’t deduct losses covered by insurance. To determine the amount of a disaster loss for your tax return, you must collect information on each asset in your business. The information you need to collect includes:
The cost basis of each asset before the disaster The decrease in fair market value of each asset as a result of the disaster
Then you will have to collect information from insurance payments in order to determine the actual disaster loss, for reimbursement purposes. You’ll also have to prove that you owned the asset or had a lease on it, the type of disaster and when it occurred. The loss must be the direct result of the disaster.
How Do I Keep Records on Business Assets for Tax Purposes?
For tax purposes, you must keep good records on your business assets, if you want to take deductions for asset depreciation and for capital gains and losses on selling business assets. Starting with the purchase of the asset, keep records on every transaction relating to your assets, including annual depreciation, repairs or modifications to assets, and other transactions.
