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In the wake of the presidential debate a few weeks ago in which Donald Trump touted his love for depreciation, the spotlight has turned to a tax strategy method that is often underutilized: using fixed assets deductions (aka Property Plant & Equipment on the balance sheet). On October 1, the New York Times underscored the potential value of such assets by releasing pages from Trump's Connecticut, New Jersey, and New York 1995 tax returns. The returns show that the Republican presidential nominee declared “other income” of negative $916 million and had the ability to cancel out federal income tax liability for up to 18 years. Much of that loss could be the result of a huge first-year depreciation expense on a highly leveraged fixed asset, such as a new casino or hotel.
Every corporate tax professional knows the importance of fixed assets accounting and how, when handled correctly, it can be a significant source of corporate tax savings. After all, the average property, plant, and equipment (PP&E) amount on the balance sheet of the top five Fortune 500 hovers around $142 billion. Yet corporations lose out on millions or sometimes billions of potential fixed assets savings annually. The next logical question is, why? Why aren’t corporations taking full advantage of fixed assets deductions? Why is this area of accounting often neglected when it comes to improving efficiency and accuracy?
These are the questions that Bloomberg BNA’s software group wanted to explore in a study conducted in late 2016. The objective of the study was to uncover:
- How companies are managing their fixed assets
- The challenges companies face in fixed assets accounting
- The practices companies adopted to address their challenges
- The typical extent of manual fixed assets management and its impact on the enterprise
While the official survey findings will not be available until next month, here is a sneak peek of what we discovered:
- Staying up-to-date on tax law, rules, and regulations is the biggest challenge, overall: Just over half of the respondents (55.4%) cited keeping track of law changes as the top challenge.
- Fixed assets accounting requires significant operational resources: Nearly three-quarters of respondents (71.3%) employ between 6 and 25 dedicated professionals focused on entry and management of fixed assets for accounting and tax purposes.
- Manual fixed assets accounting is time consuming: On average, nearly half (46.8%) of fixed assets teams spend 4-5 days per month (or nearly one-fourth of their time) on spreadsheet and database maintenance for fixed assets; over a third (34.2%) spend 6-15 days.
- Spreadsheets and manually managed databases are perceived as risky: Almost two-thirds of respondents (63.3%) are concerned about data entry errors, while nearly half (48.1%) are worried about spreadsheet formula or link errors. Concern over missed tax benefits is a close third at 44.3%.
- The majority of companies lack a robust fixed assets solution: Only about one-third of companies (37.6%) are using a dedicated fixed assets solution.
Current approaches to fixed assets accounting
With the growing importance of fixed assets management, many companies have turned to their enterprise resource planning (ERP) systems and other non-tax focused accounting systems for help. The Bloomberg BNA software study shows that ERP systems are the most-used technology tool (76.2%) by enterprises for managing and recording fixed assets.
However, while these solutions deliver efficiency and accuracy gains for many parts of the accounting process, they lack tax-specific functionality required for end-to-end management of fixed assets for tax purposes. That missing functionality forces companies to supplement the ERP with manual spreadsheets and homegrown databases for calculations, management, reporting, and more.
What’s at stake? bottom line cost savings
Considering the most frequently used approaches (ERP systems and spreadsheets) provide little or no insight into current tax laws, it’s not surprising that potential fixed assets savings in the form of immediate or accelerated deductions are often missed. But what does that mean for the bottom line?
Depending on asset cost, potential deductions could equate to millions of dollars of tax savings that could otherwise be used for other strategic efforts. As an example, new or renovated buildings—as well as major building improvements—are often put into service at the longest possible service life despite the fact that a shorter life may be allowed; in some cases the full deduction can be taken immediately for some assets.
Manual processes dominate fixed assets
Even in today’s high-automation business environment, fixed assets management continues to be a complex, time-consuming accounting function that typically suffers from a shocking level of manual effort. Research shows that organizations continue to rely on high-effort, high-risk manual processes to manage fixed assets tax data, calculate federal and state depreciation, reconcile depreciation with the general ledger, manage repair expenses, and report on fixed assets.
Changing tax laws, budget cut-backs, and restructuring challenges have compounded the issue even more, resulting in data chaos and an inordinate amount of time manually managing data. The volume of tax data processed for a typical organization is too much to handle via manual processes.
The missing piece of the fixed assets landscape
For tax teams grappling with the fixed assets challenge, the question at hand becomes how can companies ensure that their fixed assets accounting practices are up to par, while minimizing the resources required?
ERP systems, manual databases and spreadsheets are only part of the equation. When it comes creating an end-to-end fixed assets best practice, companies need to seek out solutions that will bridge the gaps of existing solutions. One way of doing this is through the use of a dedicated fixed assets solution. By addressing fixed assets gaps, managing the fixed assets lifecycle (from construction and purchase through retirement) can be transformed to a manageable, automated process. Integration with accounting and tax compliance systems eliminates redundant and manual data entry, reconciliation, and manipulation. Fixed assets data remains synchronized with the ERP, up to date, and accurate. For large enterprise companies, an end-to-end fixed assets management approach reaps significant benefits such as:
- Increased tax cash flow
- Reduced time and effort to manage fixed assets
- Improved accuracy and greater peace of mind
- Faster close
- Reduced audit risk
- A holistic view of all fixed assets
As PP&E issues rises on the priority list of the C-suite and finance department alike, companies are looking to transform their fixed asset management processes into an efficient, automated procedure. It is no longer enough to throw existing solutions at the fixed assets problem. More importantly, the use of a cobbled together, manual approach puts a company at risk. It has the potential to negatively impact on the bottom-line by missing critical tax saving opportunities, not to mention it could very easily lead to IRS audit penalties and a material weakness in financial reporting.
By Ken Crutchfield, Vice President of Software Products, Bloomberg BNA.