Tax Advantages of Proper Asset Accounting for Small Businesses

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Small business is pre-occupied with its survival, and rarely analyzes the financial statements. Accounting can serve as a valuable tool when decisions are made about the business.

But accounting also plays a vital role when it comes to the business taxes. Financial statement information such as profits, assets, and inventory are extracted directly from financial statements, and filed with the business tax return.

I will spare you the boring details of tax completion and filing, and only focus on the most overlooked areas in record keeping, that impacts on your taxes.

Tax consultants only work with information they are provided with. They don’t always dig deeper, to evaluate whether accounts were prepared in such a way NOT to compromise your business from a tax perspective. They can, but at a much higher fee of course.

One common area costing small businesses substantial amounts in taxes, is the erroneous recording or under declaration of assets that should reflect on the business financial statements. The benefit with assets is that the company can derive benefits from tax allowances, such as wear-and-tear (depreciation), installation costs (heavy machinery), and scrapping allowances. The absence or under declaration of these assets lead to lower tax claims.

In many small businesses, vehicles used in the business, are registered under the owners name. A simple transfer of the vehicles to the business could save the company significant taxes. The depreciation on the vehicle can be claimed as a tax “write off”.

Assets purchased on financial lease agreements should be capitalized as prescribed by International Accounting Practice. Small business owners assume that since it is a lease, the asset cannot be capitalized. If an asset is controlled by the small business, it belongs on the balance sheet! Financial lease payments are deductible for tax purposes.
In certain tax regimes, the finance charges on a lease could also be deductible for tax.

What about the revaluation of assets? How many businesses revalue their assets? Assets are depreciated, but unless it is disposed or scrapped, it should be revalued. What about that oak desk your grandfather purchased in 1940 for $2.00. Nobody in his/ her right mind would suggest that the desk is worth nothing. The intrinsic value in that “antique” could be far higher than you average office desk. That desk will be revalued higher than its cost price. A higher asset value equates to higher depreciation tax write offs! If there is no further use for old assets, scrap it, and claim the scrapping allowance.

How many small businesses have loose tools lying around? On revaluation on the tools it’s surprising what values are established. Amounts of between $ 30 000 and
$ 100 000 are arrived at. Now look at it this way. If annual depreciation allowances vary between 25% and 33.33% on the cost/value of equipment/tools, what is the potential tax savings to the business if it claims this deduction?

Other assets such as computers or printers should never be registered under the owner’s name, if it is meant for the business. All assets used in the business, should be recorded in the fixed assets register, providing columns for purchase date, revaluation, depreciation, assets disposed/scrapped, book values and tax values. These allowances cannot be claimed if the aforementioned system is NOT in place. It will be the first schedules that tax auditors will demand.

Many business owners overlook proper asset recording, read fixed assets register. Thus leading to higher tax assessments in the long term.

Accounting and finance related issues addressed on our website. Sean Goss www.sgafc.co.za