When you started your business, you may have bought computers, office furniture, or other equipment necessary for running your company. But you probably haven’t given much thought to these business assets since.
You might not realize it, but your physical assets make up what might be a sizable portion of the value of your company.
For example, could you do your work without your desktop computer or manufacturing equipment? Probably not. That’s why you must ensure that you manage assets the right way.
1. Identify Your Assets
Knowing what assets you have, as well as their value, is key. Make a list of any and all:
- Office furniture
- Special technology
- Company vehicles
- Buildings you own
2. Assign Value to Them
Once you have a list of your assets, determine their value. This isn’t what you initially paid for them because assets depreciate. To determine the market value of these physical assets, look for similar products (about the same age) for sale in your area (eBay is a good place to start). This isn’t an exact science but will give you a ballpark figure of what they’re worth, which will be useful later if you want to take out financing.
3. Record Your Business Assets
Now that you’ve assigned value to your assets, list them on your balance sheet. Most accounting software will walk you through the process, or you can get help from a professional accountant.
Realize that your balance sheet is just a snapshot in time, as your assets may change (especially cash and inventory) and depreciate. You’ll need to plan to update your balance sheet as assets depreciate or change significantly.
4. Insure Them
Because these assets are key to the operation of your business, you need to insure them. Business property insurance will cover replacements should any equipment be stolen or ruined due to acts of nature (flood, fire, etc.). And if you use business vehicles, you need auto insurance. Yes, these are added costs when your budget is already tight, but consider how you’d fare without insurance if something went wrong. Better safe than sorry.
5. Understand Your Assets and Taxes
An investment in an asset is a business expense, so it will reduce your taxable income. However, rather than claiming the full, say, $50,000 you paid for a large piece of equipment in one year on your taxes, you can claim part of that for several years, depreciating its value over time. This way, you get a similar tax break for years, rather than a huge one and then no benefit after that.
Let’s say your business brings in $200,000, and you spent $50,000 on equipment. By amortizing the value of that equipment over five years, you reduce your taxable income by $10,000 for those five years and are taxed on $190,000 rather than $200,000. It might not seem like much, but it can offer some tax savings.
6. Figure Out Your Depreciation Schedule
So how do you know what kind of depreciation deduction you can take for your business assets? The IRS says you must write off the depreciation over the useful life of the asset. Once that asset isn’t used, you can’t continue to write it off.
For assets like equipment, vehicles, and computers, you can write them off for up to five years. For office furniture and fixtures, you have up to seven years. For residential rental properties, depreciation can be written off over 27.5 years, and for commercial buildings or non-residential properties, 39.
7. Leverage Your Assets in Valuing Your Business
If you decide to take out a loan, seek funding or sell your business, your assets can help you.
The value of your business comes from several factors, including your revenues, your trademarks or patents, cash, and assets. If you run an ice cream shop and you have a top-of-the-line ice cream making machine as well as patented recipes, your business will be worth more than the one down the street that uses a cheap machine and gets its recipes online.
Asset-based valuation takes into consideration all the assets you have, both tangible and intangible, such as intellectual property. This valuation will help potential investors or buyers determine how much to offer in exchange for equity or a fair offer to buy it.
8. Sell Assets the Right Way
If a time comes when you decide to sell certain assets, either because you’re replacing them with better ones or because you’re liquidating your business, make sure you do it the right way.
Determine what each asset is worth. Again, assets depreciate, so that machine you bought for $50,000 five years ago might only be worth $30,000...or less. If you’re unsure what to charge, get an appraisal from a professional.
If you’re liquidating all assets as part of closing your business, you can sell through an auction. Realize, that you’ll get about 20% less than you would otherwise. If you’re in a hurry to get a cash injection, it’s still worth it to liquidate.
Don’t forget to claim the profit from the sale of your assets on your taxes, which may be taxed at capital gain rates. And remember to take the deduction off of your taxes!
As you can see, managing business assets isn’t always simple, but once you establish these processes, it will be second nature, and when you purchase new assets, you’ll know exactly what to do.
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Funded, in part, through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.