“Business tangible personal property” includes things like computers, furniture, tools, machinery and heavy equipment used in your business– even if it is owned by you personally rather than your company, even if you lease rather than purchase it, and even if it was a gift!
What this means is that, if you have a business license in Loudoun County, VA and you are reading about business taxes on your phone, laptop or tablet, you should be filing an annual return online by March 1 each year. The information you must gather for the return includes the asset description, cost and year of purchase. Twice a year, you will receive a bill for the taxes. Don’t worry – it’s not a huge amount for most small businesses. (Other jurisdictions have their own rules, tax rates and timetables.)
A lot of business owners fall into the trap of recording any purchase under the de minimis limit of $2,500 as an expense when they do their bookkeeping. DON’T DO THAT! Here’s why:
- Good luck finding those items to prepare your BTPP return by March 1!
- When you enter a durable item as an expense, it does not appear on your Balance Sheet. The Balance Sheet is an indicator of your company’s value, so keeping a fixed asset off the Balance Sheet understates what your business is worth.
- Fixed assets are depreciated over time using a method of depreciation that reflects the asset’s value to your business. The declining value of the asset is reflected on the balance sheet.
What your tax preparer does with that asset is a completely different matter! Here’s an example:
A business owner purchased a piece of equipment costing $120,000 in December of a given year. The tax preparer used special tax depreciation rules to deduct the full cost of the equipment during the tax year it was purchased, and the bookkeeper entered the full amount of the tax depreciation on the books, bringing the value to $0 on the Balance Sheet for an expensive machine that was only 1 month old! Instead, the bookkeeper should have chosen a GAAP-compliant depreciation method that reflected the machine’s value. In this case, using the straight-line depreciation with a salvage value of $60,000 would have shown a value of $119,000 at 12/31/20XX.
- Eventually, you’re going to dispose of that asset somehow, and there may be a gain or a loss. That’s a whole other blog post – but if you didn’t record it properly when you bought it, it could come back to bite you!
At The Approachable Accountant, we believe that good bookkeeping and accounting services are essential to the growth and prosperity of every small business. If you need help with these and other bookkeeping issues, we invite you to schedule a consultation.