Your company is probably using an ERP for most functions within the business. Enterprise Resource Planning (ERP) systems are collections of integrated applications which businesses use to collect, manage, and analyze data from across the organization. Oracle and SAP dominate the ERP space, but there are many other solutions out there as well. Some are industry specific whereas others are more generic and are customized for each business they are deployed for. All ERP systems provide a ‘live-look’ at each business process using common databases. ERP systems are unmatched in that regard, but they are not the perfect solution for every function within the business.
The Shortfalls of Using an ERP for Tax Depreciation
An ERP system integration is a very expensive project that usually results in numerous meetings, testing scenarios, and hours to fully implement. Due to this, a company will want each department to try and utilize the system whenever possible. The first step to any deployment of a process or system is to look at the requirements of the business function. What are the things needed by the business to execute their tasks? What functions and reporting is required? What is the timing frequency of needed calculations or reports?
At first glance, it may seem appropriate to use the ERP for tax depreciation based on its interconnected nature throughout a company. But before moving forward with the ERP approach, you need to take the following considerations into account:
- Reporting Periods (GAAP vs. Tax): For financial reporting purposes, GAAP books are generally closed on a monthly cycle and then on an annual cycle at the end of the fiscal year. For tax purposes, the fixed asset transactions may not be reviewed until the tax return is due, which can be up to 8-9 months after year-end. In addition to the timing difference, tax departments can have unique scenarios such as cost adjustments, life changes, and method changes on assets that were placed in service up to 21 months prior. If the periods where the changes are needed have been closed by accounting, it may not be possible to make these changes within the system.
- Alternative Depreciation Calculations: GAAP generally requires a single straight-line system. Tax, on the other hand, requires numerous calculations for their reporting needs. In any given year, a tax department could need 3-4 different scenarios (Federal (Bonus/No Bonus), State, ADS) to ensure their tax obligations are met. Since the ERP system is maintained by IT, it may be difficult to ensure the different calculations are properly programed into the system.
- Differing Fixed Asset Treatment (GAAP vs. Tax): Typically, the fixed asset module of an ERP system is controlled by the accounting/finance team. The concern with this approach is that the knowledge for the fixed assets is usually surrounding the GAAP book only. Often, there are different methodologies concerning GAAP vs. Tax depreciation with cost basis, asset lives, and depreciation methods.
- Unmatched Data (GAAP vs. Tax): To create a seamless and automated depreciation system, Tax & GAAP records should be matched together. This would allow any changes to an asset to be affected on both books. Far too often, these books are maintained separately in an ERP system, which can create a nightmare from a reconciliation and data loading perspective.
Standalone Tax Depreciation Software Programs
After reviewing the above points, you may see some drawbacks of utilizing an ERP system for tax depreciation. As a workaround, often tax departments that are using the ERP for tax are forced to use a hybrid approach, which usually introduces Excel. While Excel is a great program for many tasks, maintaining the file can prove to be a burden and not the most efficient approach. Fortunately for tax departments, there are standalone programs available to alleviate these gaps.
Depreciation software programs available today address each one of the shortfalls detailed above. They give the tax department the ownership of their data, reporting capabilities, and calculations. The systems can be tailored to any specific tax need a company may have. The benefits include:
- Freedom from dependency on other departments: After the system has been implemented, which usually requires IT, the tax department will be tasked with maintaining their records with little interference from other groups (Accounting/Finance, IT).
- Running different depreciation scenarios:
- ADS elections on current year additions
- Bonus elections on certain asset classes
- State-specific calculations (Pennsylvania, for example)
- System Updates: Tax law updates are handled by the software company, which ensures the system stays updated with the ever-changing laws.
- Mass Asset Changes/Updates: Using a standalone program gives the ability for a tax department to make mass asset changes. This includes additions, disposals, transfers, method changes, life changes, convention changes, and bonus election changes.
- Reporting capabilities: Standalone programs offer fully customizable data fields. This allows a user to load in any data they would need, and then generate reports using that field. For example, a tax department may want to have the location of the asset imported into a system, which assists with apportionment and property tax filings.
Marrying technology with ever-changing tax laws can prove to be an impossible task within an ERP environment. Change control, limited internal IT resources, and hesitance to change post-implementation make some of the requirements we face in the tax world very challenging in an ERP space.
Many companies are facing more complicated tax depreciation calculations than ever. If you couple this with an increasing number of fixed asset transactions in your business, this can quickly become an insurmountable task with the limitations of the ERP.
Luckily for all of us, there are available solutions that can address every need. If any of this article rings true in your business, it may be time to consider an alternative approach.
To learn more about GTM’s tax depreciation services or to speak with someone who can guide you through the process, visit us here.