How to Manage Your Small Business’s Fixed AssetsNot all your money is in the bank. Consider your equipment and tools investments that can pay off.
One undeniable rule of business is you’ve got to spend money to make money. But not all business purchases are expenses. Larger items used to run your business, such as computers, furniture or equipment, are seen by the IRS as investments in your company and assets that add value to your small business.
Matthew Foster, tax senior manager for accounting firm Frazier & Deeter, said large investments that will be used longer than a year are considered fixed assets because they are not as easily converted into cash as liquid assets, such as inventory.
As long-term investments, Uncle Sam treats fixed assets differently than regular business expenses, Foster said. Because they have lasting value, they are depreciated over time, which can save you thousands of dollars in taxes each year and improve forecasting and budgeting for your small business.
Get a handle on your fixed assets with these best practices.
Start an asset ledger
“Asset tracking is just a matter of keeping the reporting accurate with a list or ledger of the fixed assets that you have in the business,” said Foster. What information should you include in your ledger? Here’s what Foster recommended:
- Asset name
- A description of the asse
- Serial numbers and other identifying information
- Purchase date
- Purchase cost
- Estimated useful life (which your accountant can provide)
Keeping an asset ledger can save your accountant time and effort when tax season rolls around, potentially saving you tax preparation dollars.
Add new purchases right away
Tracking fixed assets is pretty simple if you take the time to do it as you go along. Instead of waiting months to update your asset ledger, log new equipment at the time of purchase, advised Foster.
“Take down all the details of when it was purchased, how much it was purchased for, and what it is.” By not waiting, you’re more likely to have all the necessary information on hand.
Perform an annual asset inventory
Next, Foster said, perform an annual inventory of your fixed assets to make sure your ledger is accurate. A yearly audit will let you know if any assets have been stolen or gone missing or are out of commission. If so, these assets can be considered a disposal on your taxes, said Foster.
“Say you have a computer that you’ve had for three years, but it’s still got two years of depreciation left on it. But the computer dies — it’s unusable. You would dispose of it on your tax return and indicate you received nothing for it. That would allow you to take the remainder value of that asset as an expense in that year.”
Consider whether you need asset management software
Fixed assets are typically easy to manage in an Excel spreadsheet, said Foster. But businesses with a lot of assets may want to consider asset management software. Programs such as Asset Panda, EZ Office Inventory and Asset4000 can assist with asset tracking, help you calculate depreciation, let you run inventory reports and more.
The downside is cost, said Foster. “I mainly work with very small, family-owned businesses, and when you start talking about asset tracking software it can get expensive fast.” Many business owners keep an inventory and let their CPA to tend to the details, since accounting firms already have access to the right software, he said.
Keep your CPA in the loop
Whether you plan to keep track of assets yourself or have your accountant do it, keep your CPA in the loop, said Foster. He or she can advise you on whether a purchase should be considered an expense or an asset, what the estimated lifespan is for the item and any regulatory changes that may affect how your assets are tracked.
Your CPA can also help you time fixed asset purchases to give you the greatest tax benefit. For example, if it’s near the end of the year and you plan to buy new furniture and tables for your restaurant, check with your CPA on whether it’s best to buy them before or after year end.
“We can actually do tax planning around those purchases and see if you purchase it in this year you’ll get a better deduction than if you purchase it in the next year,” Foster said.