What are the disadvantages of claiming an impaired asset?


Quick Answer

Claiming an asset impairment reduces net income and is not eligible for a tax deduction, reports the Houston Chronicle. Impairment of assets has an impact on both the balance sheet and income statement of a company or organization.

Continue Reading

Full Answer

It is important to assess the carrying value of all fixed assets, notes the Houston Chronicle. This figure represents the cost of an asset less accumulated depreciation. Certain circumstances may change an asset's useful life or current market value, thus requiring the need to impair the asset. When the carrying value is not recoverable, a financial statement preparer or accountant can impair the asset. This impairment loss flows to the income statement in the same section where operating income and expenses are found. A lower operating income is indicative of a lower net income, and a lower net income can change a potential investor's perspective on financial health, reports the Entrepreneur website.

In some instances, it is necessary to impair an asset such as goodwill. Impairing this asset causes a financial loss, but a taxpayer cannot take a tax deduction for this financial loss, notes the Houston Chronicle. A taxpayer must abandon the business in the middle of the tax year in order to take a deduction for goodwill impairment. Even if the goodwill is worthless, a taxpayer cannot write if off as a tax deduction until abandoned.

Learn more about Business Resources

Related Questions