Fixed assets are an organization’s tangible assets that are generally purchased for long-term use in its operations or to generate income. Often these fixed assets can make up a large part of a business’s balance sheet. Furniture, equipment, computers, leasehold improvements, and real estate are a few examples of the types of fixed assets a business might have.
Maintaining a current fixed asset listing is important for accurate financial statement reporting, budgeting and cash flow projections, and tax planning purposes. With that in mind, it is critical to follow best practices within your accounting department to keep this process efficient and effective. Below are six tips you can implement to help position your business for successful fixed asset management.
1. Establish a Capitalization Policy
A capitalization policy establishes a dollar threshold to help determine which expenditures are capitalized as fixed assets versus which items are expensed as incurred. This policy should be written and maintained with other accounting policies. If an item purchased is above the threshold, it is capitalized to the fixed asset account, recorded on the schedule, and depreciated over its useful life. For your books and records, you should follow your industry’s guidelines for useful lives and methods. For income tax purposes, see IRS Publication 946 for guidance. If an item is at or below the threshold, it should be alternatively recorded, in most situations, as a regular operating expense.
Example: Company A has a $1,500 capitalization policy. The following items are purchased: a desk for $1,650 and a chair for $500. The desk would be added to the fixed asset schedule and depreciated over its useful life. The chair can be expensed immediately as office supplies.
For federal income tax purposes, the IRS has established two thresholds for fixed asset recording. Amounts above this threshold must be recorded as a fixed asset and depreciated. This is determined on a per item, per invoice basis.
- Businesses with an applicable financial statement (AFS) may use $5,000 as a threshold. In general, AFS is an audit or a review.1
- Businesses without an AFS may use $2,500 as a threshold.2
However, a capitalization policy threshold can be established at different amounts to the extent management defines as appropriate and consistently follows. This threshold amount must be the same for tax purposes as it is for the books and records.
2. Keep a Maintenance Schedule & Define a Replacement Cycle
While an asset purchase may not be required to be recorded as a fixed asset, there could be other important reasons to keep up with purchased items and their acquisition dates. One reason might be to help keep up with required maintenance at certain intervals. For example, equipment might have an annual maintenance requirement. Another reason to keep track of purchases not on a fixed asset schedule would be to help identify a replacement timeline. Some businesses have their computers on a recurring replacement cycle. Keeping up with purchase dates of the computers will help identify when they need to be replaced. This also will help for budgeting purposes.
3. Train Your Staff
It probably goes without saying, but providing your staff with additional training is a smart investment. Developing your accounting and finance team members by training them with the skills and knowledge on this subject will help them consistently follow your internal policy. We recommend this training upon hiring—and make it recurring with your annual learning and development cycle.
4. Review Fixed Asset Listing Regularly
Similar to the emphasis placed on reviewing your goals, key performance indicators, and other business metrics, your fixed asset listing also requires similar attention. Verifying and updating your fixed asset listing at set intervals is a best practice. Be mindful to properly write off scrapped items and post monthly expenses accordingly. If you outsource the maintenance of your schedules, consider a monthly or quarterly review with your provider to keep current with depreciation expense. Falling behind or losing track of this crucial information can result in poor planning and unexpected outcomes.
5. Managing In-House by Using a Fixed Asset Software
If you have more than 50 fixed assets, multiple businesses, or assets in multiple locations, consider purchasing a fixed asset software. Using a reliable fixed asset software can reduce errors and also assist you with budgeting for future asset acquisitions. There are many third-party software options for fixed asset management, and some accounting platforms have reliable solutions embedded within or available as a module. Do your research and work with your trusted advisor to find a software that is best for your needs.
6. Consider Outsourcing
Today’s accounting and finance environment is shifting toward outsourcing, and fixed asset management is a part of this trend. Benefits to outsourcing include decreasing your administrative burdens, increasing efficiencies, saving on technology and related infrastructure, and relying on knowledgeable, experienced professionals. Many accounting firms can offer this solution, but you should consider responsiveness and reliability when considering outsourcing, as noted in this BKD Thoughtware®article. Ultimately, your due diligence process for finding a provider should start and end with trust.
If you have questions or would like to connect with a BKD Trusted Advisor™, use the Contact Us form below to get in touch. Considering outsourcing? Check out our Outsourced Accounting Services.
1 Internal Revenue Code Section 1.263(a)-1(f) established a de minimis threshold.
2 IRS Notice 2015-82 increased the de minimis threshold for taxpayers who do not have an AFS.