10 Facts About Business Assets

Business assets, or "property" as the Internal Revenue Service (IRS) calls them, are items of value owned by a business. Assets come in several types and forms from cash to land and buildings. Every business needs assets to operate. You can't run your business without things such as furniture, machinery, or vehicles. Every business owner should know 10 things about these assets.

1. Assets Can Be Tangible or Intangible

The two broadest categories of business assets are those that are tangible and those that are not. Assets can be real, or tangible, like a car or a computer that you use for business or retail shelving. They can also be intangible, such as intellectual property like trademarks, copyrights, and patents.

2. Assets Are Treated Differently for Tax and Accounting Purposes

Business assets come with different terms and processes depending on whether you're referring to accounting or taxes.

Accounting Purposes

Your business assets are shown on the business balance sheet. The assets are listed according to their liquidity, a term that relates to the ease of transferring the asset to cash because cash is the most "liquid" asset. Current assets include cash, accounts receivable, and inventory that's most quickly converted to cash. Fixed assets, like property and buildings, are less liquid and less easily converted to cash.

Tax Purposes

The IRS distinguishes types of “property” or assets depending on whether or not these items can be expensed or depreciated.

Expensing an asset means taking the tax deduction for it in the first year after you buy it. The costs of current assets and low-cost fixed assets are usually expensed or deducted from taxable income. 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 that allows you 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 under certain conditions:

• You own the asset.
• You use it for business purposes.
• It has a useful life that can be determined.
• It's expected to last for more than one year. 

Listed Property 

Listed property is a special kind of business asset. It can be used for both personal and business purposes so the IRS keeps a particularly close eye on them. Types of listed property include:

• Passenger autos
• Other property used for transportation
• Property used for entertainment, recreation, and amusement, including cameras and recording devices
  

3. Some Assets Are Depreciated and Others Are Amortized

Depreciation of assets is an important bookkeeping and tax concept because it's an expense that can lower the value of a depreciable asset and accelerated depreciation can bring tax benefits.

Some intangible assets classified under Section 197 of the Internal Revenue Code can be amortized using a method similar to depreciation. Many intangibles are amortized over a 15-year period with no value at the end of this period.

4. Assets Are Valued Differently

Various assets are valued differently and values can 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 compelled to buy or sell.

Appraisal: Some assets can be valued by a specialist known as an appraiser, creating an appraised 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 appraised.

Liquidation: Liquidation of assets is the process of getting cash for them in the process of a bankruptcy. The liquidation value is considered as cash value, and it's much less than the fair market value because the seller is usually being forced 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 usable anymore, such as old machinery for which you can't get parts, or that has been replaced by something newer and better or more fashionable.

Disaster: The IRS sets specific rules for claiming the value of assets for disaster loss purposes. You must value your business assets before and immediately after the disaster in this case.

5. It Doesn’t Matter How You Buy the Asset

The value of an asset on your business accounting system isn't related to the way the asset was purchased. An asset like a company vehicle that's purchased with cash is valued and depreciated just the same as a vehicle that's purchased with a loan.

6. You Must Use the Asset If You Want To Deduct or Depreciate the Cost

You can’t buy an asset then let it sit in a corner gathering dust. The IRS requires that you place the asset in service to claim expenses and depreciation deductions. "Placed in service" means the time that the asset is ready and available for a specific use, even if you aren't yet using it. You can't begin to depreciate a machine until year two if you buy it in year one but you don't install it and make it operational until year two.

7. Gains on the Sale of Assets Are Capital Gains

If you sell certain assets referred to as "capital assets" for a profit, you must pay capital gains tax on that profit. Most business property is considered to be a capital asset, including furniture, stocks and bonds, vehicles, and buildings. Assets that aren't 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 

The capital gain is short term if the asset is sold within 12 months of purchase. You would pay the long-term capital gains rate if it's sold after the first year.

You must first get the basis or original cost of the item in order to calculate the gain or loss on the sale of an asset. The basis includes all costs involved with the purchase of the item, including commissions, fees, setup, and training on the item's use.

Long-term capital gains are taxed at a different, kinder rate than other types of income. The tax rate depends on the owner's income. The rate is 15% for most taxpayers.

9. Assets Can Be Used As Collateral for Business Loans

A lien is placed against the asset when you're required to use it as security for a business loan. The lien gives the lienholder first right to the asset and requires that the loan be paid off before you can sell it. Car loans are a good example of collateral. The value of the car is used as collateral for the loan.

10. Assets Can Be Analyzed To Show 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 a company puts its assets to work.

You can get a value of your current assets that you can quickly turn into cash with a quick ratio. Add up your current assets, not including inventory, and divide the total by your current liabilities, what you owe and must pay back within a year. This number shows you how much cash you might be able to get your hands on quickly in an emergency.

The Bottom Line

It's important to keep excellent records of business assets, starting with their purchase. Include all information on asset costs, on depreciation, on salvage value, repairs and maintenance, and any appraisals of the asset.

Frequently Asked Questions (FAQs)