When discussing financial terms and concepts, it is important to understand what a capital asset is and how it can be utilized to improve the financial status of a business. Capital assets are any assets owned by a business that have a long-term, tangible value to the business.
In the simplest terms, a capital asset is a piece of property or resource that is expected to provide a long-term benefit to its owner. Examples of capital assets can include securities, buildings, land, machinery, equipment, and intangible assets such as copyrights, trademarks, goodwill, intellectual property, and patents.
These assets are different from current assets like inventories and accounts receivable, which are expected to be converted to cash within the cash cycle of a business (within 12 months). Capital assets, on the other hand, are not typically consumed or converted into cash within a year and usually have a longer life-span (longer than one year). Therefore, they are held for longer periods.
Gaining a Complete Capital Asset Overview
When a capital asset is acquired, the original cost of the asset to the business is used to calculate annual depreciation and to determine the asset’s current value. This concept of the cost basis is important when it comes to the sale of a capital asset. Generally, when a capital asset is sold, any difference between the proceeds of the sale and the cost basis is either a taxable capital gain or a deductible capital loss.
For example, if a business purchased a piece of industrial equipment for $20,000 and sold it for $24,000, the $4,000 difference would be subject to capital gains tax on the business’ part. Alternatively, if the business sold the same piece of equipment for $15,000, the $5,000 difference would be deductible and subject to capital losses.
In either instance, it is important to understand the capital assets of a business in order to avoid unnecessary taxes and be aware of the underlying value of the business’ assets. Whether a business is considering buying or selling, the assets and costs associated with those assets, play an important role.
The Advantages of Capital Assets for Businesses
There are several advantages to retaining capital assets and resources that can benefit businesses, including:
- Capital assets often appreciate in value over time, increasing the net worth of the business.
- Capital assets can generate revenue for the business through leasing or other uses.
- Capital assets are tangible and provide stability to the business and the market value.
- Capital assets are long-term investments that represent the business’ assets, enabling the business to have more control over operations and finance.
In conclusion, businesses should have a good understanding of capital assets and their various uses. Capital assets can enable a business to capitalize on their investments while simultaneously stabilizing the overall health of the business. In doing so, businesses can increase their net worth and ensure they have the resources to last for years to come.