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Do You Have Ghosts in Your Fixed Asset Roles?

Oct 27, 2016 10:00:00 AM |

David Stevens

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68147055_illustration-[Converted].jpgEvery year, the civic organization I joined hosts a haunted house during October as a fundraiser. I am always amused by visitor’s reactions to the ghosts and goblins as they creep through the house. Some aren’t scared at all and just ignore the actors.  Everyone else goes from mildly to massively frightened; it seems to depend on the person’s situation. 

We seem to love being scared by the ghosts that show up at Halloween. We know where to look for them and recognize them when we see them, but are you as excited about the ghosts that might exist in your fixed asset roles? 

A typical ghost asset is an equipment purchase you made in a prior year, but now it no longer exists anywhere except on paper. When a ghost asset remains on the fixed asset report, you may be paying unnecessary property tax.

Here’s what you need to know about ghosts in your fixed asset roles:

  • If a description is generic on a fully depreciated item in the fixed asset report, it could represent a “ghost asset” which exists on paper only. This will cause the company to continue to over pay property tax on assets that do not exist.  
  • While fully depreciated “ghost assets” do not impact the income tax, it could overstate the equipment and accumulated depreciation in financial reporting. It depends on the company’s operation whether it is a material error.
  • During a sales/use tax audit, the auditor obtains a copy of the fixed asset listing to examine for potential use tax liability. If an entry is generic (“equipment or AMEX bill”) the auditor will contend it is subject to tax, unless you can produce documentation to show the correct tax was applied by the vendor.  This can prove to be a challenge during the audit.
  • Some jurisdictions have the authority to impose a penalty of 10 percent of tax for failure to “procure” a list of taxable property. Most jurisdictions also have penalty provisions for filing property renditions after the due date.  A rendition is required to annually add assets to the rolls or remove assets that no longer exist.
  • Having overstated assets could impact the amount of insurance coverage you really need which is another cost to consider.

Although not all states impose a property tax on personal property, such as equipment or inventory, unfortunately many still do. Some helpful steps to take to improve your fixed asset reporting and potentially reduce your tax burden include:

  • Know your business operation and assets used by the company.
  • Have an adequate description for the asset to be able to recognize when it is no longer owned.
  • Track asset additions and assets when disposed.
  • Record assets in defined groups after an acquisition and not just entered as store equipment.

By taking steps during the year or performing asset reconciliation periodically, you can save money by not overstating your assets for tax purposes.

 

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THIS POST WAS WRITTEN BY David Stevens

David is a director at HORNE LLP, specializing exclusively in state and local tax matters. He specializes in income and franchise tax, sales and use tax, business incentives and state credits, unclaimed property, and advocacy/controversy matters. David has served a number of clients in the manufacturing, telecommunications, retail, healthcare, financial services, transportation, food and beverage, construction, energy and technology industries.

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