One good example of a secured loan is getting a loan to buy a car for business use. The loan is a business loan, not a personal one, and the interest on the loan is deductible as a business expense. Because of the mobile nature of personal property, and because personal property decreases in value over time, it is more difficult for a creditor to use personal property to secure a loan. For example, if a bank loans money on a building, it can be sure that the building will not be moved. But if a bank loans money on the car, the car can be driven away and it depreciates over time.
Example of Personal Property for a Business
Personal property for a business would include everything from the smallest stapler or calculator to a company-owned car or large piece of machinery. It includes manufacturing equipment, office furniture and equipment, computers, tablets, cell phones, and vehicles purchased and used by the business, and, basically, everything that isn’t “nailed down.” In other words, personal property is movable, while real property is not. The types of property that a business owns are slightly different from that of an individual, and the tax issues involved with business property are also different.
Types of Personal Property
Tangible personal property is personal property that can be felt or touched. Tangible personal property in general (not just for businesses) includes furniture, equipment, vehicles, household goods, collectibles, and jewelry. Intangible personal property is personal property that cannot be felt or touched. This type of personal property includes securities, bonds, CD’s, and other intangible assets. Intellectual property—patents, copyrights, trademarks/service marks—is considered personal property because these types of property can be bought and sold or licensed. Listed property is a specific type of personal property. It consists of property that can be used for either business or personal reasons. The most common type of listed property is a busines car; it includes trucks and vans that have been modified for business use. If you want to deduct the cost of listed property, it must be used more than 50% of the time for qualified business purposes, and follow other IRS regulations for this type of property.
Personal Property and Business Loans
Business property can be used to provide security for a business loan. Either real property (land and buildings) or personal property can be used as collateral for a loan. The allocation of the security on property allows the lender to take back or sell the property if the business defaults on the loan. One good example is getting a loan to purchase a car for business use. The loan is a business loan, not a personal one, and the interest on the loan is deductible as a business expense. Because of the mobile nature of personal property, and because personal property decreases in value over time, it is more difficult for a creditor to use personal property to secure a loan. For example, if a bank loans money on a building, it can be sure that the building will not be moved. But if a bank loans money on the car, the car can be driven away and it depreciates over time.
Personal Property and Business Taxes
The cost to buy personal property is a deductible business expense if it is “ordinary and necessary” Ordinary means that the expense is common and accepted in your industry. A necessary expense is helpful and appropriate for your trade or business type . In some cases, the purchase price can be listed as a business expense in the first year of purchase. To take this deduction, the cost of the property must be less than $5,000 per item or per invoice, and meet some other qualifications. In most cases, however, the cost of the item of personal property must be spread out over the useful life of the item. This process of spreading out an expense over time is called either depreciation for tangible property or amortization for intangible property. Each item of property or type of property must be depreciated or amortized based on a schedule. Listed property, for example, usually must be depreciated using a special alternative depreciation method. This method, which increases the number of years over which property may be depreciated, and this decreases the yearly depreciation expense you can take.
Keeping Records on Personal Property
Whether you have one computer for your solo business or a roomful of vehicles for a delivery company, you need to keep good records on business property. From the time of purchase, you need to keep good records on each item of business personal property, including the cost of the item, all costs associated with buying it and maintaining it, and any depreciation taken on the item. The records are for your own use, and to back up any deductions, for the IRS.
