In the course of operating your business, you will likely accumulate many types of tangible and intangible business assets. Tangible assets include business vehicles, equipment, supplies and real estate. Intangible assets include copyrights, trademarks and patents. Some assets are worth keeping for the life of the business, while others might have a shorter lease in the course of your business’ life.
For the latter category, selling off those assets might be a viable strategy for your business. Whether you’re looking to make some revenue or even looking to sell your business completely, divesting unneeded assets can put some cash back in your pocket.
A Few Things You Need to Know About Assets
But before you start making price tags, there are a few things you need to know, especially when it comes to assigning them a dollar value.
1. Assets Depreciate
All business assets will depreciate over time either from normal wear and tear, or from obsolescence. This depreciation affects not only what the assets are worth, but also how much of the asset’s value you can use as a tax write-off.
2. You Need to Keep Good Records
Whether selling or taking deductions for your business assets, good records are essential. Understanding the true value of the asset, including its purchase price, any depreciation, modifications or repairs or other transactions relating to the asset are all important when looking to truly understand your asset’s value.
3. Asset Sales Will Affect Your Business Tax
When you sell a business asset, you will either sell it for a profit and incur a capital gain, or sell it for less and incur a capital loss. How this effects your business tax is directly related to how long you owned the asset before the sale. It’s important to remember that the IRS requires you to list both capital gains and losses on your tax return.
4. Deduct an Asset’s Value Through Donation
If you find that you can’t sell your assets or are having a hard time making a sale, it might be worthwhile to donate the asset to a qualified non-profit organization. If so, make sure you receive a receipt from the non-profit for your records. Additionally, if the item has a high value, you might want to get an appraisal on its value from a third party. This will help you accurately calculate your deductible amount.
5. Strive to Sell All of Your Assets for Their Fair Market Value
You may find yourself selling your assets in order to pay off your debts, meaning you won’t necessarily see any of the sale price. Especially in this case, it’s important that you work hard to get the fair market value and minimize the losses to your company’s creditors.
How to Accurately Record Asset Sales
As mentioned above, come tax time it’ll be very important that you have accurate and complete records for all of your assets.
For assets purchased during the tax year, your records should include:
- Initial cost of the asset including sales tax, delivery/shipping charges, setup, accessories and training
- Description of the asset
- The date it was first used for your business
- The usage percentage for your business
For assets sold during the tax year, your records should include:
- Description of the asset
- Date it was sold
- The sales price
- Any selling fees, including broker fees or advertising expenses
- Accumulated depreciation for the asset from the date it was purchased, which is typically provided by your accountant
Additional Ways to Divest Your Business of Its Assets
Aside from an outright sale, there are also a few other ways you can get rid of your business assets. These are:
- Nontaxable exchange: This means that you exchange the asset for another while not recognizing any gain or deducting any loss. Any gain or loss isn’t realized until you sell or otherwise dispose of the item you received in the exchange, at which point you’re allowed to acknowledge it. A common type of nontaxable exchange is a like-kind exchange, where you exchange one item for a similar one.
- Abandonment: You can abandon your business assets and record it as a loss on your tax return. To truly abandon an asset, the IRS must determine that there isn’t any potential for future use.
- Casualty Loss: If your business assets are lost through a man-made or natural disaster, you can write off the asset. Keep in mind that obsolescence is not an example of casualty loss. In order to determine your loss, there is a formula you’ll need to use that takes into account your adjusted basis, purchase price, already declared depreciation and more. For more information on this formula, click here.
Selling off your business assets might be a viable option for you if you’re looking to either sell your business all together or are simply looking to clear out your storage room of older or unused equipment. Simply make sure to accurately record information regarding the asset so that taking deductions on next year’s taxes doesn’t become a hassle.
For a deeper dive into how much your business assets are worth, read our article on understanding asset valuation.