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Thread: Tax Advantages of Proper Asset Accounting for Small Businesses

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    Tax Advantages of Proper Asset Accounting for Small Businesses

    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 R2.00. 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 R 30 000 and
    R 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.
    Sean Goss We all are scared, but only few are brave.
    www.sgafc.co.za

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    Dave A (25-Mar-09)

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    A question on revaluation:

    Revaluation is clearly invaluable if you buy a going concern so as to move as much goodwill value as possible into depreciable assets.

    But to my mind there seems to be little benefit in revaluation of an asset that has already been capitalised and depreciated once already on the books of a going concern - unless you are looking to push up the nett asset value for some reason. Surely introducing a cycle of revaluation and depreciation on the same asset could also lead to a sense of humour failure from SARS.

    Or am I missing something?
    The trouble with opportunity is it normally comes dressed up as work.

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    I hear you, but I had a case recently of computer equipment written down to R2000, The equipment was stolen and the insurance company settled to the tune of R125000. Depreciation should be fair, note depreciation, not practice note 19 tax rate.In the above case, excessive depreciation (33,3%) resulted in lower book values, than actual book values, we were forced to revalue the assets.
    Read my article on insurance claims.
    Sean Goss We all are scared, but only few are brave.
    www.sgafc.co.za

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    Site Caretaker Dave A's Avatar
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    My thoughts were more along the lines of the old oak desk

    I have no argument with revaluation in that computer theft example.
    Would the "profit" of that revaluation be taxed as a capital gain in that instance?
    The trouble with opportunity is it normally comes dressed up as work.

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    No, that profit is tax free. Have you ever been to seminars on new IFRS(International Reporting Finance Standards). Many accountants depreciate assets using SARS, rates. When depreciating, "Useful Life" and "economic life", may not be the same thing. Look at it this way, a church/ non profit will retain that computer for more than 5years(useful life), whereas businesses upgrade every 6 months(economic life). That depreciation must be factored in to present fairly. So a business might write off the assets at 33,3%, but the church might have to use a rate of 16.67, otherwise the balancesheet is not fairly presenting the state of affairs of the organisation.What happens if the fixed assets register give me a value of R1.00, (for that oak desk), but you and I know it will fetch a substantially higher price in the market? We have no choice but to revalue that asset. Assets should be disposed or scrapped when they reach a value of R1.00, if not, revaluation is our only option. And by the way, the Tax man gives you an allowance on the VALUE, not the COST of an asset!!!
    Sean Goss We all are scared, but only few are brave.
    www.sgafc.co.za

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    Depreciation-Useful Life, or Economic Life

    Depreciation is the definition in accounting for a reasonable estimate, in monetary terms for the loss of value of an asset over a period in time. Since most assets are capitalized on the balance sheet, in financial statements, the “cost of depreciation”, is provided as an expense on the income statement.

    Many debates on depreciation are continuing in accounting circles, since it is difficult to establish what would constitute a “reasonable estimate”. It was furthermore accepted, until recently, that land and buildings cannot depreciate, but appreciates. Recent developments, however, have now implemented depreciation on buildings.

    Tax “write-offs”, on assets complicates matters further, since prescribed statutory rates for tax reductions are higher than depreciation rates, thus creating variances between tax values and book values of assets.

    It is my contention that asset accounting can only be performed thoroughly, with the assistance of an astute accountant. The accountants know how on fixed asset registers, accounting standards and firm grasp of tax legislation is vital.

    Whereas tax writes offs on assets are higher, the trend in accounting is to depreciate assets in terms of its useful life, and not its economic life. The prescribed rate for a computer in tax would be three years or 33, 3%. But a business could only use it for 6months and sell it as a scrap. This 100% provision for depreciation, as useful life, should be factored in. Office furniture could be utilized for 5 years, and then scrapped, but tax rates could prescribe four years, for a tax write off!

    The rate that businesses would depreciate their assets at coincides with the economic life of an asset. So accepted economic life is useful life for business assets.
    In non-governmental organizations and non profits (churches etc) the picture becomes very confusing. Churches will retain assets such as furniture for up to 40 years. Even computers that businesses normally upgrade from 6 to 12 months are used for 3 to 4 years!

    So if the useful life method is applied, in non-profits ,assets could have a depreciation rate as low as 2%. Accounting standards expect fair presentation. Depreciation rates, for NGO’s and non-profits should be carefully applied.

    No one expects a business owner or director, of a Non Profit Organization to understand these concepts, just to ensure that at the very least, a proper asset accounting system is in place.
    Sean Goss We all are scared, but only few are brave.
    www.sgafc.co.za

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    Quote Originally Posted by sgafc View Post
    Have you ever been to seminars on new IFRS(International Reporting Finance Standards).
    No - I just interrogate accountants with wierd questions, mine and others passing by

    OK. This is now getting very interesting.

    I have a vehicle in the company that has been depreciated down to R1.00 over 5 years. I now sell the vehicle at (for example) R30 001.00.

    Essentially, that R30 000.00 would be tax free income?

    I know there was a time when it was tax free, but I thought it was subject to capital gains tax nowadays.
    The trouble with opportunity is it normally comes dressed up as work.

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    Hi

    If you want to pay CGT on it please be my guest..
    Just enter it in to the Capital Gain Section on your tax form:

    But if you clever you will calculate/declare the gain in such a way, that you not compromised CGT has Base cost calculations as well as exemptions, its not that simplistic, add to that recoupments on allowances previously granted.. then it become interesting...
    Sean Goss We all are scared, but only few are brave.
    www.sgafc.co.za

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    So reading between the lines - revalue then sell?
    The trouble with opportunity is it normally comes dressed up as work.

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    Theres a nice "loophole", here(assets, depreciation,revaluation)....but I wont tell....
    Sean Goss We all are scared, but only few are brave.
    www.sgafc.co.za

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