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Ghost Assets and How They Could Be Haunting Your Business

In turbulent economic environments such as this, it is important for businesses to look for ways to reduce unnecessary costs, and “ghost assets” is one area that is commonly overlooked.

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In turbulent economic environments such as this, it is important for businesses to look for ways to reduce unnecessary costs, and “ghost assets” is one area that is commonly overlooked.

In turbulent economic environments such as this, it is important for businesses to look for ways to reduce unnecessary costs, and “ghost assets” is one area that is commonly overlooked.

What is a ghost asset?

A ghost asset is a fixed asset that has been physically disposed of (i.e., sold, trashed, scrapped, traded in, stolen, lost, gifted, donated, replaced) but has not been removed from the company’s general ledger and fixed asset tracking software.

How do ghost assets get onto your books?

Ghost assets are a common issue created through a disconnect in communication between the operations and accounting functions within a business. Businesses are generally very good at tracking additions, since funds are being expended. However, when an asset is disposed, there is no perceived economic impact other than the potential replacement cost.

As a result, it is very easy for these events to go unreported to the business’ accounting function. Unfortunately, these miscommunications can have significant economic impacts on your business for years if they go unnoticed.

What are some of the potential costs of having ghost assets on your books?

1)    Increased property tax liability

If ghost assets are left on your books, you could potentially be paying property taxes on property that you no longer own. If this asset is not disposed of in the company’s general ledger, fixed asset tracking software and Connecticut personal property declaration, the company will pay property taxes on that residual value every single year until that asset is disposed of on the CT personal property declaration. If there are numerous ghost assets, this unnecessary property tax cash outflow could be significant.

2)    Increased insurance premiums

If ghost assets are left on your books, you could potentially be paying insurance premiums to insure property that you no longer own or use. If this asset is not disposed of in the company’s general ledger and fixed asset tracking software, when the accounting department runs a report to send to the insurance company, it will show that piece of equipment is still present.

The insurance company will factor that replacement value into their insurance premium quote this year and every year after that until that asset is disposed of in your fixed asset tracking software. A significant unnecessary cash outflow could occur in the form of inflated insurance premiums.

3)    Improper reporting of income and assets on financial statements and income tax returns

If ghost assets are left on the books, you could be incorrectly reporting net income and assets on your financial statements and income tax returns, which can cause a whole host of issues. In addition, financial statements and tax returns net income will not be accurate, because the company did not write off the disposed asset and will erroneously continue to depreciate an asset it no longer owns.

Furthermore, assuming the company is a pass-through entity for tax purposes, such as an S corporation or a partnership, the unadjusted basis of assets for purposes of the 199A 20% qualified business income deduction will be improperly overstated. These unintentional errors could have a significant impact on the company’s and owner’s federal and state income tax liabilities.

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These are just a few of the adverse implications that ghost assets can have for your business.

What can you do to remove ghost assets from your books and prevent them from ever coming back?

The first step in scaring away ghost assets is to conduct a fixed asset inventory study to identify any ghost assets that may be lurking in your general ledger and fixed asset tracking software. Once all the ghost assets have been identified, they should be disposed of in your general ledger, fixed asset tracking software, financials, list of insured assets with your insurance company, income tax returns, and personal property tax returns.

It is important to note that the mass disposal of assets on your property tax returns may flag your business for a property tax audit. It may benefit you to notify your town/county assessor ahead of time (far before the property tax return is due, if possible) to let them know you conducted a fixed asset inventory study that revealed a number of ghost assets that you are disposing of in this period. In addition, an explanatory statement to the personal property tax return may be warranted.

If a large amount of ghost assets were present in recent years, it may be possible for you to file back-year amended personal property tax returns to get refunds. However, you should proceed with caution whenever filing an amended return seeking a refund from your municipality.

Once your books are clean and free of ghost assets, proper internal controls and technology infrastructure should be set in place and employed to prevent ghost assets from ever coming back to haunt your business. But the first step is vigilant bookkeeping and communication; by adhering to both, ghost assets can cease to be an issue for your business.

 

Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.

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