The Billion Dollar PP&E Balance Sheet Savings Opportunity
Corporations lose out on millions, sometimes billions, of potential fixed assets savings annually by not taking full advantage of available deductions.
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 companies hovers around $142 billion. Yet corporations lose out on millions or sometimes billions of potential fixed assets savings annually.
In a study conducted in the latter part of 2016, the software group of Bloomberg Tax set out to find why corporations are not taking full advantage of fixed assets deductions, and why this area of accounting is so often neglected when it comes to improving a company’s efficiency and accuracy. The objective of the study was to uncover how companies are currently:
- Managing fixed assets across the organization
- Facing an increasing number of accounting challenges
- Implementing best practices once identified
- Assessing the impacts of manual fixed assets management
While the official survey findings will not be available until next month, here is a sneak peek of what was discovered:
- Staying up to date on tax law, rules, and regulations is the biggest challenge: Just over half of the respondents (55.4%) cited keeping track of tax law changes as their top challenge.
- Fixed assets accounting requires significant operational resources: Nearly three-quarters of respondents (71.3%) employ between 6 and 25 professionals dedicated to the 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 one-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 process: 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 Tax Technology 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 functionality for tax purposes required for end-to-end fixed assets management. This forces companies to supplement their ERP system with manual spreadsheets and homegrown databases for calculations, management, reporting, and more.
What's at Stake? Bottom Line Cost Savings
ERP systems and spreadsheets provide little to 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, thereby impacting the bottom line.
Depending on asset cost, potential deductions could equate to millions of dollars of tax savings that could be used for other strategic efforts. As an example, new or renovated buildings, and major building improvements are often put into service with the longest possible life despite the fact that a shorter service life may be allowed; in some cases the full asset deduction can be taken immediately.
Manual Processes Dominate Fixed Assets Management
Even in today’s technology-savvy business environments, 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 these high-risk manual processes to manage and report on fixed assets tax data, calculate federal and state depreciation, reconcile depreciation with the general ledger, and manage repair expenses.
The volume of tax data processed by a typical organization is too large to manage via manual processes. Changing tax laws, budget cut-backs, and restructuring compound the situation, resulting in data chaos and an inordinate amount of time expended.
The Missing Piece of the Fixed Assets Landscape
For tax teams grappling with the fixed assets challenge, the question becomes how to ensure that their company’s 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 to creating an end-to-end fixed assets solution, companies must seek out ways to bridge the gaps that exist in their current processes. By managing the fixed assets lifecycle from construction and purchase through retirement, it can be transformed into 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 enterprises this automated management approach is extremely beneficial, yielding:
- Increased tax cash flow
- Reduced time and effort
- Improved accuracy with greater peace of mind
- Reduced time to close
- Reduced audit risk
- A holistic view of all fixed assets
As PP&E issues rise on the priority lists of both the C-suite and finance departments, companies are looking to transform their fixed assets management into an efficient, automated process. It is no longer enough to cobble together a manual approach that may actually put a company at risk and result in a negative impact on the bottom line. Missing critical tax savings opportunities, could easily lead to IRS audit penalties and a material weakness in financial reporting.
Fixed Assets™ from Bloomberg Tax enables companies of any size to automate and manage their fixed assets. With built-in compliance and the latest tax code, it simplifies the fixed assets process from construction and acquisition through disposal, helping to offset liabilities throughout the life of the asset.