How to Include Tax in the Value of Fixed Assets in Microsoft Dynamics 365 Business Central

How to Include Tax in the Value of Fixed Assets in Microsoft Dynamics 365 Business Central

Introduction:
In the realm of accounting, particularly under U.S. GAAP (Generally Accepted Accounting Principles), fixed assets should be recorded at the cost of acquisition. This includes all expenditures directly related to acquiring, constructing, and preparing the asset for its intended use—expenses such as freight, sales tax, transportation, and installation are all capitalized. However, users of Microsoft Dynamics 365 Business Central often encounter a challenge when taxes assessed on the purchase of fixed assets are not automatically included in the asset’s recorded value. This blog post explores how to adjust settings in Business Central to ensure that tax is included in the value of fixed assets.

Understanding the Default Behavior:
In Business Central, when you add a Fixed Asset in a Purchase Order and mark it as taxable with a specific Tax Area Code, the system typically posts only the amount excluding tax as the value of the fixed asset. This default setting can lead to discrepancies in the book value of the asset and its actual acquisition cost, especially when tax is a significant expense.

Configuring Tax Inclusion in Fixed Asset Valuation:
To align Business Central with GAAP requirements and ensure that taxes are included in the fixed asset value, follow these steps:

1. Modify Tax Jurisdictions Settings:

   • Navigate to Tax Jurisdictions in Business Central.
   • Within Tax Jurisdictions, locate the Tax Details section. Here, you will find an Expense/Capitalize field.
   • Set the Expense/Capitalize field to true. This action directs the system to treat the tax amount as a capitalizable part of the fixed asset cost, rather than an expense.

2. Create a Dedicated Tax Group Code:

   • It’s beneficial to set up a separate Tax Group Code specifically for fixed asset acquisitions.
   • Configure this Tax Group Code to ensure that the Expense/Capitalize setting is enabled.
   • This distinct grouping helps maintain clarity in transactions and ensures correct treatment across all fixed asset acquisitions.

Why Default Settings Exclude Tax:
The default configuration in Business Central to exclude tax from fixed asset values might be designed to provide flexibility for different accounting practices globally or to cater to regions where tax should not be capitalized. The ability to configure these settings allows organizations to adapt the software to comply with local GAAP and tax laws.

Implementing the Change:
After adjusting the settings as described, all new fixed asset acquisitions processed through Business Central will include the applicable tax in the asset's book value, aligning financial records with accounting standards. Ensure that these changes are documented and communicated within your finance team to maintain consistency in handling future fixed asset purchases.

Conclusion:
Setting up Business Central to include tax in the valuation of fixed assets ensures compliance with GAAP and provides a more accurate financial representation of your asset costs. By adjusting the Tax Jurisdictions settings and creating a dedicated tax group for assets, companies can streamline their accounting processes and maintain accurate and compliant financial records.

For businesses unsure about modifying these settings, or for those who need more tailored advice, consulting with a certified Business Central or accounting professional is recommended. They can provide insights and assistance tailored to your specific business circumstances and regulatory environment.