Tax treatment of Fixed Assets Written off

[Asked by Guest]

I want to know whether the amount of Fixed Assets written off is allowed as business loss under Income Tax Act ?? If it's allowed, then what is will be the depreciation on those assets as per Income Tax Act ??

P.S. The assets are destroyed, and can't be used.

[DR.MARIAPPAN GOVINDARAJAN]

Whether there is any insurance claim for these assets?

[YAGAY and SUN]

https://www.accountingtools.com/articles/how-do-i-write-off-a-fixed-asset.html

A fixed asset is written off when it is determined that there is no further use for the asset, or if the asset is sold off or otherwise disposed of. A write off involves removing all traces of the fixed asset from the balance sheet, so that the related fixed asset account and accumulated depreciation account are reduced.

There are two scenarios under which you may write off a fixed asset. The first situation arises when you are eliminating a fixed asset without receiving any payment in return. This is a common situation when a fixed asset is being scrapped because it is obsolete or no longer in use, and there is no resale market for it. In this case, reverse any accumulated depreciation and reverse the original asset cost. If the asset is fully depreciated, that is the extent of the entry.

For example, ABC Corporation buys a machine for $100,000 and recognizes $10,000 of depreciation per year over the following ten years. At that time, the machine is not only fully depreciated, but also ready for the scrap heap. ABC gives away the machine for free and records the following entry.

	Debit	Credit
Accumulated depreciation	100,000
Machine asset		100,000

A variation on this first situation is to write off a fixed asset that has not yet been completely depreciated. In this situation, write off the remaining undepreciated amount of the asset to a loss account. To use the same example, ABC Corporation gives away the machine after eight years, when it has not yet depreciated $20,000 of the asset's original $100,000 cost. In this case, ABC records the following entry:

	Debit	Credit
Loss on asset disposal	20,000
Accumulated depreciation	80,000
Machine asset		100,000

The second scenario arises when you sell an asset, so that you receive cash (or some other asset) in exchange for the fixed asset you are selling. Depending upon the price paid and the remaining amount of depreciation that has not yet been charged to expense, this can result in either a gain or a loss on sale of the asset.

For example, ABC Corporation still disposes of its $100,000 machine, but does so after seven years, and sells it for $35,000 in cash. In this case, it has already recorded $70,000 of depreciation expense. The entry is:

	Debit	Credit
Cash	35,000
Accumulated depreciation	70,000
Gain on asset disposal		5,000
Machine asset		100,000

What if ABC Corporation had sold the machine for $25,000 instead of $35,000? Then there would be a loss of $5,000 on the sale. The entry would be:

	Debit	Credit
Cash	25,000
Accumulated depreciation	70,000
Loss on asset disposal	5,000
Machine asset		100,000

A fixed asset write off transaction should only be recorded after written authorization concerning the targeted asset has been secured. This approval should come from the manager responsible for the asset, and sometimes also the CFO.

Fixed asset write offs should be recorded as soon after the disposal of an asset as possible. Otherwise, the balance sheet will be overburdened with assets and accumulated depreciation that are no longer relevant. Also, if an asset is not written off, it is possible that depreciation will continue to be recognized, even though there is no asset remaining. To ensure a timely write off, include this step in the monthly closing procedure.

[DR.MARIAPPAN GOVINDARAJAN]

Fantastic narration

[YAGAY and SUN]

Thanks Sir.

We are learning from you by reading the articles written by you.

[Ganeshan Kalyani]

In my view the amount written off is an admissible expense. Thanks

[ChandraShekhar Keshri]

Dear YAGAY and SUN

The question asked by Monica shetty is tax treatment of Fixed Assets written off - whether written off of fixed assets is allowed as business loss as per income tax or not ?

But you reply all the facts from basic entry to closing entry but you have not give the answer whether it is allowed business loss as per income tax act.

Thanks

AI Summary

Write-off of fixed assets: accounting loss treatment explained, tax admissibility depends on insurance recoveries and statutory analysis.
Whether accounting write-off of destroyed fixed assets is an allowable business loss under the Income Tax Act was queried. The discussion explains accounting treatments: reverse accumulated depreciation and remove fully depreciated assets; write off undepreciated carrying amount to loss when not fully depreciated; recognise gain or loss if sold; and consider insurance receipts. It provides journal-entry illustrations and administrative controls but offers no definitive statutory tax conclusion; one participant opined the write-off is an admissible expense.