Account classifications are used to aggregate fixed assets and represented into asset groups, which share the same depreciation methods, useful lives, and journal entries and accounts.
IRS has set guidelines on the period over which the asset should be depreciated. Improper tax classification of fixed assets can lead to a tax audit by IRS.
Pre-defined asset groups (and its useful life)
- Buildings (28 years)
- This account may include the cost of acquiring a building or the cost of constructing one. If the purchase price of a building includes the cost of land, apportion some of the cost to the Land account (which is not depreciated).
- Computers (3 years)
- This classification can include a broad array of computer equipment, such as routers, servers, and backup power generators. Depending on the capitalization limit set by the company, a lower cost of desktop and laptop computers do not require tracking these items as fixed assets.
- Fixtures and furniture (7 years)
- This category includes a broad range of moveable fixed assets that have no permanent connection to the structure of a building our utilities. These items depreciation substantially but definitely are important costs to consider in business valuation.
- Land improvement (15 years)
- Includes any expenditures that add functionality to a parcel of land, such as irrigation systems, fencing, and landscaping.
- Machines (5 years)
- This category includes production equipment, materials handling equipment, molds, tooling, and similar items used to produce goods to be sold to customers or for internal use.
- Software (3 years)
- Typically includes the purchase of company-wide software, such as ERP solutions. Software license costs and functional implementation service costs, such as training and software customization, can be expensed as the cost incurred. The accounting for internal-use software varies, depending upon the stage of completion of the project.
- Vehicles (5 years)
- This asset group contains automobiles, tractors, trucks, and similar types of rolling stock.