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Business Tax Tip: Manage Your Fixed Assets to Save on Taxes

Working on growing your business is important. However, working to improve your business is also important. One aspect that many businesses (whether established, startup, big or small) allocate little resources is the accounting and finance function.

Not understanding the financial or accounting data, your company has may cost you money.

Many start-ups and small businesses neglect their fixed asset tracking.

Here are 3 traps that can cost your business money:

1.      Having phantom assets on your books. Many companies keep fully depreciated assets (such as old computers) on their books even if they may have been disposed of years ago. Assets that are disposed of should be written off the books as property tax is assessed based on a fraction of the initial purchase price of assets on your books. California county assessors never use a zero value for old equipment.

 

2.      Lumping multiple assets into 1 line item. (For example, lumping 10 computers into 1 entry). By having separate assets, it’s easier to track for insurance purposes as well as tax purposes. For tax purposes, there is no California bonus depreciation and the Section 179 expense election is limited to $25,000 so a separate identification of assts can help maximize your Section 179 deduction.

 

3.      Recording fixed asset purchases incorrectly. Many companies who buy assets on installments record each installment payment as a new asset. When an asset is acquired the whole asset should be recorded on the balance sheet and any remaining balance should be recorded as a liability. When the asset is placed in service, it’s full value is depreciable (not just the portion that was paid). By recording the asset correctly, depreciation can be fully utilized in the year of purchase.

 

Have more questions on how your accounting impacts your taxes, contact Richard Pon, CPA for a consultation.

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Richard Pon CPA, CFP