Deciding On Asset Ownership
Posted by Tax Man - 06/12/11 at 02:12 amAs a business entity owner, you would think a company should always own its assets. After all, it is commonly known that the purchase price of an asset is tax deductible. But let’s take a look at the whole picture before we decide.
Deducting The Cost
Asset refers to any purchase for use in the business for the production of income. But the asset must have an expected life of more than one year. The asset must also be in the name of the business to be deductible. The Internal Revenue Service (IRS) will allow the business to deduct the cost of the item that will last beyond one year over time. Not considering the IRS exceptions, a $20,000 asset that is expected to last ten years will be deducted at a rate of $2,000 per year. Your basis in the asset decreases over time as you deduct the cost. When you sell the asset, you take the selling price less your basis to determine your gain or loss for tax purposes. Basis is your cost less any amount used for a tax deduction.
So a $5,000 original five year asset is sold at the end of year four ($1,000 basis) for $2,500. You have a tax gain of $1,500 ($2,500 less $1,000). Now if it was a personal asset you would have a loss of -$2,500 as you were not able to deduct any of the cost. But personal losses are not tax deductible either. But personal gains are taxable.
Trucks
You may deduct the price and maintenance costs of a company owned vehicle. But the same is not true for a leased vehicle. A leased vehicle has very special rules to be followed by all types of companies. More than one company that uses the same vehicle is a case where you would want to consider the standard mileage method. It will be easier to determine from a written log which company should be awarded which mileage expense. If the vehicle is use less than 50% for business use, it would be advantageous to only use the standard mileage method to avoid tax implications.
State Tax
It is a good idea to become familiar with your state business entity taxes. Some states tax all assets at a high rate every year. Until you sell the asset, you will continue to be taxed on it. Leased assets of any kind are taxed at a very high rate in many states. The only way to avoid these taxes is to only have personally owned assets.
