What is a Fixed Asset Sales Tax Audit?
A fixed asset sales tax audit is usually part of a larger sales tax audit. This typically represents the final stage of the process when the auditor is preparing to close the audit.
Definition of Fixed Assets
Fixed assets are assets purchased for long-term use and are not likely to be converted quickly into cash. Examples include:
- Land
- Buildings
- Equipment
Example: Fixed Asset Audit in the Restaurant Industry
Let’s consider an example involving a restaurant undergoing a sales and use tax audit.
Review of Sales and Goods Purchased
The auditor first ensures that the cost of goods purchased and sold aligns with the restaurant’s reported sales.
- For example, if the cost of goods sold (COGS) was $1,000.00, the auditor will:
- Apply a mark-up
- Apply sales tax to the entire amount
Review of Consumables
Next, the auditor examines consumables such as:
- Napkins
- Forks
The purpose here is to verify whether sales tax was paid on the supplies purchased by the restaurant.
Review of Fixed Assets
Finally, the auditor reviews the fixed assets. According to the definition provided earlier, these items include:
- Machinery
- Equipment
- Racks
Importance of Proper Documentation
At this stage, it’s critical that you have saved receipts for these larger, more expensive items. This documentation serves as proof to the auditor that sales or use tax was paid on those assets.
Organized records make this process smoother and help avoid unnecessary tax liabilities.
Frequently Asked Questions
What triggers a fixed asset sales tax audit?
A fixed asset sales tax audit is often initiated when a business undergoes a broader sales and use tax audit. It typically occurs at the end of the process, as auditors verify tax compliance on large purchases.
Why are fixed assets a focus during audits?
Fixed assets often represent significant expenditures, and auditors want to ensure the correct amount of sales or use tax was paid at the time of purchase. These assets can easily be overlooked, resulting in tax liabilities.
What documentation is needed for fixed assets?
You should maintain detailed receipts and purchase records for fixed assets such as equipment and machinery. This helps prove that sales or use tax was properly paid, avoiding penalties.
How do auditors handle restaurant audits?
Auditors review sales and the cost of goods sold, then inspect purchases of consumables like napkins and forks, followed by a detailed review of fixed assets such as kitchen equipment and racks.
What are common mistakes businesses make?
Common errors include failing to keep receipts for large purchases, assuming tax was paid without verification, and misclassifying items as non-taxable when they actually are taxable fixed assets.