Selling a Business Asset is Not Taxed Like Normal Income

An inviting target for improvement in small business bookkeeping is accounting for sales of business property. Proper recording of these events assures the usage of appropriate tax rules.

A most important element of correct accounting for selling business assets is that the nonrecurring nature of these transactions is removed from ordinary income categories. This process renders a rational perspective on routine income sources. Analysis that compares past periods and assesses trends, therefore disregards income distortions triggered by uncommon asset sales.

Not Just Net Proceeds

Selling an asset used in business is always reported on a different tax form than normal business income. Therefore, the main bookkeeping procedure deserving of vigilant oversight is recording the sales price of each sold asset in a separate account for Other Income on the Profit and Loss Statement. Some sales are complicated because they involve multiple assets. For instance, a sale of land with a building and a fence is three distinct assets. You must divide the total sales price among the assets sold.

Of course, the entire sales price is not profit. You also have costs for the sale. These are recorded in an Other Expense account on the P&L. Examples of these expenses are commissions paid to a selling agent or delivery costs for sending the sold asset to the buyer.

Account for the gross sales price in your Other Income account. Then apply all the deducted selling expenses to your Other Expense account. Any amount withheld from the sales price that repays indebtedness you owed is applied to the liability account on your Balance Sheet for the loan. A loan payoff for more than the liability account balance is interest expense on the P&L. The net amount after all deductions goes to your cash account on the Balance Sheet.

Removing the Asset

The biggest expense related to a business property sale is normally the original cost of the asset. This was not an expense deduction when you acquired it. Rather, it was added to an asset account on the Balance Sheet. A bookkeeping procedure that’s commonly unfamiliar at first but sensibly grasped following able assistance, is the removal of a sold asset’s original cost from the Balance Sheet. It’s transferred to the Other Expense account.

A crucial issue to remember is that some of the original asset cost has already been expensed as depreciation. Prior depreciation expense was offset by equal negative values to an asset account for Accumulated Depreciation. This negative Balance Sheet figure combined with the account for the asset’s original cost reveals net depreciated cost. Your bookkeeping maneuver that transfers the original asset cost to Other Expense must also move to Other Expense the Accumulated Depreciation for that particular sold asset. Consequently, the net depreciated cost becomes the primary component of Other Expense.

A complex collection of tax statutes applies distinctive rules to different types of sold business property. But entrepreneurs can turn vice into virtue by the simple process of separately accounting for each asset sale and its associated costs.

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