Exorcise your ghost assets: Stop paying unnecessary property tax
Outdated and out-of-service fixed assets can haunt your tax profile
INSIGHT ARTICLE |
Everyone has ghost assets on their fixed asset systems. You know the ones:
- The computer you placed in service in 2002 that was donated to a local school years ago
- The shuttle that hasn’t run in years but is parked…somewhere, maybe
- The kitchen equipment that got replaced, twice
Once these assets are fully depreciated, most companies do not give them a second thought, and expend little, if any, effort to track them down and write them off. But ghost assets can affect your bottom line by taking up space in your servers, adding to your personal property tax base, overstating the cost and accumulated depreciation balances on your financials, and increasing the effort to consolidate or outsource certain functions within your organization.
Here is an example of how quickly a simple business decision can get complicated:
A hotel has a soft-goods and/or case goods redo. Virtually everything with a short tax life is being replaced. However, the controller does not dispose of the replaced assets because they are fully depreciated for GAAP and tax, and they were set up as single assets representing multiple quantities, so there is uncertainty that the correct assets would be disposed of. Due to time constraints and to maintain the same method of accounting for the prior short-lived assets, the controller sets up the new assets the same way the original assets were set up. Seven years go by, and another soft goods/case goods redo occurs, and again no dispositions of the replaced assets occurs. Now the hotel has three generations of assets on its books, which needlessly increases its basis for personal property tax purposes.
Even in a scenario where the controller tries to do the right thing and dispose of the replaced assets, will the controller know which assets to dispose of, and which ones to keep? What can be done to simplify the process of retiring assets when they are no longer in service? How can the controller avoid the pain of culling through hundreds or thousands of lines of assets when a transition of an internal function occurs?
Begin at the beginning…
The best way to avoid confusion at the end of the asset lifecycle is to properly identify it at the start. You should physically tag every newly purchased FF&E asset with a code that is tracked by the department that purchased the assets. The affixed codes should be integrated with the data recorded in the fixed asset system at purchase. So when an asset is tracked through its lifecycle, the controller won’t have to hunt through the fixed asset detail to figure out which asset is being disposed of when it goes out of service.
If you are not already taking this step—or are in the process of developing a system that supports such identification—you can add a room location or some other unique identifier to an asset’s description in the fixed asset system (such as “Room 120 Armoire”). This short-term solution can get complicated, though. For example, if the armoire gets moved to another room, the asset name will likely not change. In other scenarios, you may purchase equipment, such as coffee machines or computers, in bulk, with no specific user in mind. These are entered 10, 20, 30 at a time as one asset into the fixed asset system. In this case, you will be challenged to determine what amount of that bulk asset should be written off at the end of the individual equipment lifecycles. And that is if you’ve been tracking the equipment overall. For companies less diligent, ghost assets are the result.
Returning to best practices, your goal should be to create distinct records that can be traced throughout the asset’s lifecycle. To do this you should:
- Individually record the purchase of an asset in the fixed asset system rather than in bulk
- Tie the asset tracking process into the initial asset recording process when an asset is purchased and placed in service
- Assign the tracking code physically applied to the asset to the fixed asset detail (either as the main asset ID or entered into a supplemental field in the fixed asset system using a required field in the accounts payable system)
This approach simplifies the process of recording dispositions as they occur as the employees responsible for tracking fixed assets are using the same fixed asset detail found in the asset ID or supplemental fields.
…and plan to reassess
If your company has not implemented a strategic asset identification process, you can always begin with new assets and eventually cleanse most of your records. During this transition, and recommended thereafter for data integrity, you should consider mandating an annual fixed asset inventory and disposition audit into your company’s capitalization policy.
Most capitalization policies tell you everything you need to know about setting up an asset, and very little about retiring one. Your capitalization policy should have language describing a mandatory disposition process. A required annual disposition audit should mandate that a physical inventory be taken at a time other than year end to ensure that the process does not get lost in the thicket of higher, more visible priorities. This will ultimately reduce the time devoted to the fixed asset inventory process, and ensure that the sub-ledgers supporting your financial statements reflect what the company actually owns. You should partner with those responsible for filing the company’s personal property tax returns as well. They are responsible for getting the asset basis as low as possible for assessment purposes and together you may identify assets on your system that have been previously disposed.
There is no reason your company should be haunted by ghost assets. Take the time now to set up proper processes:
- Record the individual assets in your fixed asset detail
- Apply an effective tracking system to each asset purchase
- Make that tracking data accessible to the employees who track fixed assets for their group
- Mandate an annual disposition audit to weed out unused or abandoned assets
- Write off the assets you no longer own as soon as they are out of service
Doing so will de-clutter your fixed asset detail, make it easier for the income tax and property tax people to do their work, and ensure that your financial statements reflect what you actually own. You will also have a system that is more easily transitioned should your business operations change through outsourcing or acquisition. If the right information is in place, the end result will be a lot less scary.
featured case study
Experience and focus on details helped a client gain efficiency, improve processes and realize millions in tax savings on fixed assets.