A fixed asset can be considered a tangible item that a business owns and uses to generate income. This can range from machinery and vehicles to any other fixed item used in a business’s operational quest for revenue. It is important to keep a record of fixed assets purchased, as the tax implications may be different for fixed assets as what it is for working assets.
Tax treatment of fixed assets vs. working assets
Fixed assets and working assets are treated differently for tax purposes, primarily due to their distinct roles in a business’s operations. Fixed assets, such as buildings, machinery, and vehicles, are typically subject to depreciation deductions over their useful life. This means that businesses can deduct a portion of the asset’s cost each year, reducing taxable income. Working assets, on the other hand, like inventory or accounts receivable, are not depreciated but may be subject to different tax treatments. Inventory may be deductible as a cost of goods sold when sold, while accounts receivable are not taxed until they are collected.
These varying tax treatments reflect the unique financial characteristics and lifecycles of fixed and working assets. Understanding this can help businesses manage their tax liability more effectively while accounting for their different roles in generating revenue and supporting operations.
The importance of recording fixed assets
Real estate, land, machinery, vehicles, and IT equipment are examples of fixed assets. A fixed asset in QuickBooks can also be referred to as a tangible asset. As outlined above, you can think of tangible/fixed assets as equipment or property that your business owns and needs to function and generate income. On a balance sheet, they appear as PP&E: property, plant, and equipment.
Accurately recording a fixed asset purchase like in QuickBooks helps you:
- Monitor your finances and the impact of the purchase,
- Accurately file your taxes at the end of the year,
- Give your tax practitioner the information they need for tax planning.
Using our QuickBooks guide to record a fixed asset in QuickBooks can help you avoid errors when recording these items.
How to record a fixed asset purchase in QuickBooks Online
In QuickBooks Online, the Fixed Item Asset List can be used to track individual assets. This list allows you to enter information pertaining to the amount you purchased an item for, the date you purchased the item, and whether you purchased the asset new or used. Follow the instructions below to add purchase details of your fixed assets in QuickBooks.
1. Open the Fixed Asset Item List
- From the menu bar, select List > Fixed Asset Item List
2. Add a New Item
- Click the “Item” button in the lower-left corner of the list window.
- From the pop-up menu, select the “New” command.
- You will see the “Asset Name/Number” field. Input the name or number of the asset.
3. Select Account
- Next, use the “Asset Account” drop-down to select the asset account that should be used when tracking the value of the said asset.
4. Purchase Information Section
- In the “Purchase Information” section, select the option to identify if the item is new or if it is used.
- In the “Date” field input, record the date you purchased the item.
5. Asset Information Section
- Under the “Asset Information” section, describe the item by using the “Asset Description” box.
- Click ‘OK’ to save and close the New Item window.
Selling a fixed asset
Selling fixed assets within a business is a strategic decision made to unlock capital, streamline operations, or adapt to changing market dynamics.
Remember to consider these crucial steps when selling a fixed asset:
- Asset valuation: Determine the current fair market value of the asset to set a realistic selling price.
- Negotiation and Agreement: Engage in negotiations with potential buyers and create a clear purchase agreement outlining terms and conditions.
- Payment and Transfer: Receive payment from the buyer, transfer ownership, settle financial obligations, and update accounting records.
- Tax Considerations: Consult with tax advisors to understand the tax implications and reporting requirements associated with the sale.
- Legal Compliance: Ensure you meet all legal requirements, permits, and licenses for the sale.
Marking fixed assets as sold within QuickBooks
Machinery and other asset upgrades are inevitable. If your business sells old equipment, this can also be recorded in your QuickBooks software, as it also affects your tax filing. To record selling an asset, access the Sales Information section and do the following:
- Mark the “Item Is Sold” section,
- Enter a “Sales Description” that will be followed by a sales date, price, and expense.
Get help with QuickBooks Online
The most important part of implementing accounting software is having it set up correctly, to suit the needs of your business. An incorrect setup can lead to inconsistencies between your books and bank recon statements, and this would ultimately affect your tax filing. It is recommended that businesses consult the experts when implementing new software to aid accurate setup and train staff who will be making use of the software most.
Fusion CPA has certified accountants who are experienced in using QuickBooks Online and understand the intricacies of the software setup. We can show you how to add assets in QuickBooks Online and walk you through the process of using the software to its full potential. Our team of experienced accounting professionals can help you keep your software up-to-date to avoid unwanted issues with the IRS.
This blog article is not intended to be the rendering of legal, accounting, tax advice, or other professional services. We base articles on current or proposed tax rules at the time of writing and do not update older posts for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.