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Why your organization needs to get fixed asset depreciation right from the start

August 3, 2023 Article 3 min read
Authors:
Jonathan Winterkorn Dave Hossink Kyle Downey
Every organization knows that fixed asset depreciation must be calculated every year, and nearly every tax director and CFO dreads the process. The key to effective fixed asset management lies in building a solid foundation using specialized expertise. Here’s how.
Business professionals discussing fixed asset depreciation.The larger a business gets, the more complicated its annual fixed asset reconciliation and reporting process becomes. Whether the growth results from business acquisitions or the normal course of operations, it can drive significant increases in the time and money invested into fixed asset management. One year, the business prepares the calculations in-house and it goes relatively quickly then, then a few years later it suddenly takes weeks for a team of accountants to complete all of the schedules.

Getting the fixed asset foundation right

There are many fixed asset management software solutions available, but they won’t help if the initial data entry related to an asset is incorrect. A solid foundation is essential, preferably built in the early days of the business when fixed asset management is relatively straightforward, and it’s easier to properly classify fixed assets for income taxes. Remember, at some point in the life cycle of the business fixed asset depreciation is likely to become more complex, and it’s important not to be lulled into complacency early on.

A solid foundation is essential, preferably built in the early days of the business when fixed asset management is relatively straightforward.

The fixed asset depreciation process for taxes

Fixed asset depreciation for tax purposes is a complex process that calls for significant expertise. Tax depreciation requires that each individual asset be reviewed and classified properly with specific recovery period, depreciation method, and convention. When an asset is first placed in service, additional expertise is required to determine its eligibility for immediate expensing, tax credits, and incentives; the business must track any transfers between entities, impairments, rebates, credits, and other value adjustments. And whenever the business disposes of an asset, it must navigate intricate gain/loss reporting rules. If these decisions and calculations aren’t handled correctly for each asset throughout its useful life, it can result in missed tax deductions, large reconciliation variances, and audit risk for the entire life of the asset.

Fixed asset management impacts each business uniquely

The pain points can vary somewhat by industry but, sooner or later, every business will feel them. On the real estate side, it may require tracking dozens of property acquisitions each year, followed by the construction of buildings and other improvements related to the property. On the manufacturing side, it could involve managing acquisitions and dispositions of hundreds or even thousands of pieces of equipment during the year, as well as new buildings and upgrades to existing facilities. Questions abound. Does this type of light get an energy efficiency credit? Is the first year depreciation on this truck limited? What happens for tax purposes if the value of an asset changes? Are leased assets treated the same for tax? A fire destroyed part of our building this year, is that a tax deduction? For any capital-intensive business, fixed assets are going to have a significant impact on the tax return, and the process of properly classifying and electing relevant treatments can result in valuable tax savings.

The bottom line when it comes to fixed asset management

Given the potential complications of fixed asset depreciation, it can pay to bring in consultants with technical tax expertise to get the elections and calculations correct from the outset. Businesses can benefit from the insights of specialists to turn these complexities into tax planning and savings opportunities. Getting specialized help for this critical piece of the process can greatly reduce the time spent on tax provisions — not to mention the time spent during the year keeping staff updated on tax law changes related to fixed asset depreciation — and free your internal team for other accounting functions.

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