Many organizations struggle with the volume of data and the diversity of accounting and tax regulations for fixed assets. Addressing them effectively requires experienced personnel, well-thought-out processes and sophisticated systems. Getting it wrong can lead to both significant tax consequences and lost planning opportunities.
How can your company strike a balance between the time and cost associated with managing your fixed assets and the relative benefits of that investment? What tax process and technology options are available? What tax planning opportunities are embedded within fixed asset data?
The right answers start with understanding the challenge.
Data volume and regulatory complexity
Taxpayers with significant fixed assets share three key issues that combine to create huge volumes of data:
- High transaction volumes, including fixed asset acquisitions, disposals, improvements, retirements, impairments, geographic movement and obsolescence
- Numerous accounting and tax attributes per transaction, including purchase or sales price, sales tax, delivery point, basis for book and tax purposes, depreciation (often in numerous jurisdictions), class life, embedded intangible value, etc., all of which require analysis throughout each asset’s life
- Multiple taxing jurisdictions (federal, state, county, municipal) each applying specific rules in various circumstances often with contradictory results
This massive variety of data all must be managed to address a host of planning and compliance concerns, including:
- Conducting cost segregation studies in the acquisition year to classify each asset appropriately and to identify embedded intangible value, service costs, software elements and other items.
- Making decisions to expense or capitalize assets and maintaining appropriate records supporting that decision to satisfy complex IRS regulations.
- Calculating basis for each asset, which calculation can differ among jurisdictions.
- Maintaining all necessary data to support depreciation calculations for GAAP accounting and federal, state, alternative minimum, sales, and real and personal property tax purposes.
- Managing all data relative to any tax credits, development contracts or other incentives involving fixed assets.
- Determining whether or not a general asset election is appropriate for federal tax purposes.
- Tracking data throughout an asset’s useful life, including changes in location; sale, loss, improvements, exchange or destruction of an asset; and any changes to applicable laws or regulations. The sheer volume of assets and data involved often leads to inaccuracies, such as fixed asset sub-ledgers not agreeing with the general ledger due to accounting process shortcuts.
Planning opportunities
Your fixed asset processes and systems not only must track all of this data and all of these regulatory concerns for accounting and tax compliance, they also can provide you the ability to analyze your fixed assets for planning opportunities. Key planning opportunities include:
- Intangible value segregation. Personal property taxes are assessed only on tangible personal property, but many asset acquisitions encompass elements of both tangible and intangible property. For example, a significant portion of the purchase price of assets like telecommunications equipment or manufacturing can be attributed to the software that runs the machinery. Segregating that portion out of the fixed asset value can result in significant tax savings.
- Cost segregation for constructed assets. While nonresidential real property has a 39.5-year life, many features of a construction project can qualify for significantly shorter useful lives, thus accelerating depreciation. This process is controlled by very specific federal tax rules and requires extensive knowledge of the real property construction process to ensure proper acquisition and construction cost classification. Certified engineers are needed to analyze the issues and prepare reports.
- Eliminating taxes on ghost assets. Due to the sheer volume of asset data records, assets that were long ago retired or replaced often remain on a company’s fixed asset listing and continue to be subject to personal or real property taxes. An effective fixed asset management approach avoids this expense.
- Sales and use tax accuracy. Many states have conferred beneficial tax status on certain industries or assets. Assets used in manufacturing and research and development processes are sometimes exempt. And, of course, taxes vary from jurisdiction to jurisdiction. Effective fixed asset processes and systems allow you to take advantage of sales tax minimization opportunities.
What’s the right approach for your company?
How can your company best balance the expense of and benefits from managing your fixed assets? The right information technology is part of the answer. A variety of tools exist to track the details of fixed asset activity carefully and accurately, but these technologies can be expensive to implement and difficult to maintain. They also require constant updating to maintain compliance with complex tax rules. Tools alone are not enough. You also need skilled personnel who understand both the systems and the tax and accounting rules. This combination of personnel and technology costs has many companies seeking more cost-effective fixed asset solutions. Strategies gaining favor include:
- Outsourcing or co-sourcing fixed asset processes to firms that are expert in managing such repeatable processes
- Engaging tax advisory and process experts to redefine the flow of fixed asset data and the process used to capture, analyze and classify the data properly
- Conducting detailed review of asset records to attain tax benefits
- Linking tax calculation technologies to financial accounting software to streamline recordkeeping processes
- Reviewing existing procedures and processes to identify efficiency creating changes that minimize resources committed to fixed asset functions
The costs and benefits of an effective fixed asset management approach are very real. If you are not sure that your company is managing your fixed asset challenge as effectively as you should, this may be a good time to re-evaluate your approach.
