Jan 30 2009
SALE OF OPERATING ASSETS - Generating Cash Flows for your Ongoing Operations
To finance ongoing operations, Companies can generate cash flows from a variety of sources, including:
2) SALE OF OPERATING ASSETS (such as plant and equipment)
Gains (losses) on the sale of operating assets generally are taxable (tax deductible).
Some gains may be tax deferred, particularly when the sale was nonvoluntary (e.g., due to condemnation) or old property was being traded in for new.
Some losses are nondeductible: There are limits on capitals losses, passive activity losses, and losses between related parties.
Gain or loss is the difference between an asset’s sales price and its adjusted basis. Adjusted basis is original cost, plus improvements, less accumulated depreciation.
Gains generally are treated as capital gains. capital gains are not taxed in many jurisdictions. In those where they are, capital gains usually are taxed at ordinary income rates unless offset by other capital losses. Losses on the sale of operating assets usually are treated as ordinary losses and are fully deductible.
Note that depreciation previously taken reduces an asset’s basis. This generally results in reducing the loss or increasing the gain if the asset is sold. Thus, the tax benefit of depreciation flows from time value.
Selling operating assets simply to generate cash flow may not make business sense. This is because unless the asset is traded in for a new asset, its absence will decrease value-added. Because there is also a financial accounting gain or loss, there is an effect on earnings that may in turn affect management bonuses. Finally, the timing of any gain on the sale can be negotiated with the buyer. That is, if the buyer is willing to accept payment over time, the tax on the gain can be recognized ratably over time.
On next post, we’ll cover other source of financing.
