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How To Get Rid Of, Sell Or Otherwise Dispose Of Your Fixed Assets

In order for most small businesses to make money, they need both inventory (or a service) and fixed assets, the long-term capital investments used in the production of income. Fixed assets are things like computers, vehicles, and tools of the trade—whatever your company purchases with the intent on holding on to for longer than a year, usually. But what happens when it’s time to get rid of, sell off, or otherwise dispose of those assets? But unlike in our daily lives, fixed assets used in the production of income need to be accounted for throughout their “useful lives,” depreciated according to a particular schedule (on both the company’s general ledger and in books submitted to the IRS come tax season or during an audit), and disposed of when the time comes—whether that’s when the asset becomes outdated, when it has depreciated fully, or when it comes to sell assets off.

Why would a business need to dispose of an asset?

Assets break, and sometimes can’t be repaired; they can also be repaired, but the cost of constantly fixing it can begin to outweigh outright replacement. Assets become out-of-date as time goes by, or your company pivots, or you identify a more efficient technology. Assets can also age out of being within company standards. Perhaps just a piece of an asset is bad, and can be disposed of and replaced by a new part.

Related Article: 5 WAYS TO MOVE INTO A NEW ERA OF ASSET MANAGEMENT

There’s also the possibility that your business needs to downsize, or you go out of business entirely. If that’s the case, you still have responsibilities to properly dispose of your assets and fulfill your tax obligations.

Have you been depreciating your assets?

Depreciation is how businesses allocate the cost of their asset over its expected useful life. If you buy a machine and expect it to work for 10 years, you don’t simply buy it for however much money the first year and forget about it for the next nine. This is usually a good thing: depreciation is an expense, and it decreases the company’s taxable income over the life of the asset, which may reduce the amount the company needs to pay in taxes. To calculate the depreciation of an asset, for both the balance sheet and income statement, businesses need to understand the rules of calculating depreciation for different types of assets, as well as the various methods. There’s straight-line depreciation, declining balance, double declining balance, and a few others. There are various benefits to each method, and some may be better suited for internal bookkeeping than for the financial statement submitted to the IRS. To keep track of every asset’s depreciation schedule—as well as to make note of things like standard maintenance usually needed to extend the life of the assets—companies are increasingly looking to fixed asset management solutions like automated systems and software, which automatically depreciate assets, send maintenance alerts, and leaves a defined, audit-friendly trail that will make IRS compliance way easier than it’s ever been. Failing to depreciate your assets and keeping good record of their standing can result in ghost assets, which cost companies in terms of both slowed production and higher property taxes.

How to dispose of your assets

Most automated systems will be able to easily walk you through asset disposal, if not take care of things outright. But when you remove a capital asset from your business, you’ll need to report this change to the IRS. Long-term capital gains (most fixed assets are kept for at least a year, so they qualify) are taxed at a lower rate than other income, and a loss means a deduction. On the other hand, you may be taxed on the Net Investment Income. Basically: You may owe some money, you may not, depending on factors including whether you had a gain or loss, how long you owned the asset, the type of asset, your income, your taxable income, whether depreciation recapture is required, or whether you receive payment for your asset all at once or spread out over subsequent years. So here are the main methods of asset disposal, to give you an idea of what to expect when getting rid of an asset. Sale You might sell an asset to another firm once you get a newer model. To determine whether you gained or lost on the sale, subtract your cost and your selling expenses from the selling price. Then you’ll pay capital gains tax on the remainder, assuming you gained money on the sale. However, if you took a depreciation deduction on the asset, you’ll have to “recapture” the depreciation and pay taxes on it at ordinary income tax rates. If you lost money, you can take a capital loss deduction. Abandonment If you abandon—just toss out—property that isn’t fully depreciated (maybe you got fed up with fixing it one too many times?), you can take an ordinary tax benefit loss, assuming the property isn’t tied to debt. Repossession and Foreclosure An accountant can and should help you deal with this tricky situation. You may be able to create a “taxable event” out of your cancellation of debt, which can help turn a loss into a gain. Trade-in and Exchanges Donation You may be in a position to donate your assets to a certified nonprofit. If you do, you’ll need to give a fair market value to the property—your depreciation schedule may be helpful here, though if it’s an expensive item, get it appraised. Then you reduce that value by the ordinary income and the short term capital gain that would have come from selling rather than donating. Again, a tax pro would be helpful here. Involuntary Conversion Sometimes forces out of your control force you to dispose of an asset, such as theft of your property. If so, this loss should be reported and any reimbursement from your insurance company will also need to be reported. The replacement assets will help determine whether you have a tax loss or gain. You’ll notice a common theme among a lot of these situations: They usually call for an accountant. While most small business owners are satisfied with the work their accountant does, according to the most recent Wasp State of Small Business Report, few of them put the right tools at their accounting team’s disposal. Only 17 percent use an asset management system that allows for auditing—yet the top complaint across the board is that accountants are more reactive than proactive when it comes to finding solutions to problems. The best way to fix that is to make identifying assets in need of disposal before they’re past due. A manual process makes that very difficult. Consider upgrading your system and you’ll have your assets longer, working better, and making less of a dent in your overall profit—even when it comes time to buy new ones.