Understanding the Details in Tax Accounting for Asset Sales

The confounding variables surrounding sale of a business asset typically result in difficulty attaining concrete accounting determinations. Money received from the sale is only a single element in the transaction, which is not simply added to income. That would only be the constructive solution when selling a small item that was categorized as an expense when originally acquired. But the cost of a fixed asset such as equipment or a vehicle is expensed over time as depreciation. This is very different than staplers or calculators. Understanding how this difference appears in financial statements leads to identification of the underlying details ultimately conveyed to a tax accountant when an asset is sold.

The original cost for a fixed asset – and the part of that cost already expensed as depreciation over time – form an interlocking network with the sale proceeds. The difference between the asset’s cost and its accumulated depreciation is carried on the Balance Sheet as a net book value. A sale price that’s greater or less than book value is recorded as a gain or loss.

Book value is what the business is giving up in the sale. The asset’s original cost and accumulated depreciation are moved from the Balance Sheet to the Income Statement as a cost of sale. The selling price is recorded on the Income Statement as sale proceeds. Both the cost and proceeds typically appear in the same account as gain or loss, but a tax accountant needs both figures to accurately report the transaction. Repayment of a loan owed for the asset has no impact on the gain or loss. This simply affects the amount of selling price received as debt reduction rather than as cash.

%d bloggers like this: