Simply put, assets are stuff that your business owns. From vehicles to tools, computers to pens and paper, the things that help you work are assets. Buildings and land are assets too, but even if you rent, chances are you have assets of some kind. Even the software you use on your business computer is an asset.
In the business world, assets generally fall into one of two very broad categories: Assets that are expected to last a year or less, and assets that have a useful life of more than one calendar year.
The practice of depreciation theoretically spreads out the cost of large assets over a set period of time, and allows the business owner to recoup a portion of the cost a little every year, in the form of a deduction.
Buildings get what’s called the straight-line depreciation method, which means their costs are spread evenly over their expected life span. Items that aren’t expected to last as long – office furniture, computers or company vehicles for example – may be able to have more of their costs deducted in the early years of their service life, using accelerated depreciation.
Here’s how accelerated depreciation works: Let’s say a company buys an air compressor for $2,000 that has an expected service life of 10 years. Under straight-line depreciation, the company would claim $200 in depreciation on the unit in each of the 10 years it’s in service. Under accelerated depreciation, the company would claim $400 for each of the first five years of the service life (the recovery period), then claim nothing for the second five years. Accelerated depreciation can be an attractive way to recoup costs more quickly.
Section 179 expensing is a way to write off (or “expense”) the entire cost of some assets in the year they’re acquired, rather than depreciating it over the service life. Named after its section in the tax code, Section 179 gives businesses the option to treat such assets – such as vehicles, office equipment and furniture – as deductible business expenses.
There are limits, of course. A business can't expense more than its taxable income. For 2018, up to $1 million can be claimed under Section 179. This cap is reduced dollar-for-dollar by the amount exceeding $2,500,000. There are also limits to how much you can expense per year on company vehicle purchases.
Selling a Business Asset
Disposing of a business asset could have consequences for your financial bottom line, whether the asset is sold, exchanged for other property, destroyed, or simply abandoned.
Assets for personal use or investment are generally capital assets. That means a sale could generate a capital gain or a capital loss. The assets used in the day-to-day operation of your business, however, are considered Section 1231 assets (named for another section of the tax code).
Section 1231 gains and losses are combined at the end of the year. If there’s a net loss, it’s viewed as an ordinary loss, offsetting ordinary income. A gain is considered a long-term capital gain, and taxed at a lower rate than regular income.
What’s covered? The IRS says gains or losses from these actions qualify for Section 1231 treatment:
- Sales or exchanges of real property or depreciable personal property (must be used in trade or business and held longer than one year)
- Sales or exchanges of leaseholds (must be used in trade or business and held longer than one year)
- Sales or exchanges of cattle or horses (must be used for specified purposes and held for two years or longer)
- Sales or exchanges of other livestock (does not include poultry; must be held for specified purposes and held for one year or longer)
- Sales or exchanges of unharvested crops
- Cutting of timber, or disposal of timber, coal or iron ore
- Condemnations (property must be business property or capital asset and held for more than one year)
- Casualties and thefts (must affect business property and must be held for longer than one year)