Details Matter in Tax Accounting for an Asset Sale

There are so many variables surrounding the sale of a business asset that it can be confusing.

Money received from the sale is only one element in the transaction; it’s not simply added to income as if you were selling a small item that was categorized as an expense when originally acquired. The cost of a fixed asset, such as equipment or a vehicle, is expensed over time as depreciation.

Understanding how this difference appears in financial statements helps you identify the underlying details for your tax accountant when the 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 either a gain or a 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; however, your tax accountant needs both figures for accurate reporting.

Finally, repaying the asset’s loan doesn’t impact the gain or loss; it affects the amount of the sale price received as debt reduction rather than as cash.