The underperforming of assets such as equipment and machinery can lead to a decrease in value to that asset. A cause for this decrease in value can be a result of physical deterioration, functional obsolescence, or economic obsolescence.
These three ways that decrease an asset’s value are known as inutilities.
Although inutilities are something a company will not want to have with their assets, it is an inevitable outcome as time continues. However, if an asset experiences inutility, business owners have two options. The difference between these two options may have a very noticeable impact.
The first option an owner will have is to merely continue use with their asset while it underperforms or does not meet the standards it should. Secondly, the owner may receive an appraisal in order to have the true fair market value of the asset determined. Reasoning behind the second option would not be in case the owner was seeking to sell this underperforming asset, rather this option would have the potential to decrease the tax assigned to it.
In a number of states, an ad valorem tax is imposed, whereby a company’s machinery and equipment are taxed based on their value. Consequently, if these machines and equipment are overvalued, the tax on them will be higher than it should. To ensure that the tax on these assets is no more than it should be, a proper appraisal is necessary. This is where the recognition of inutilities makes a difference.
For example, just because an asset does not experience much physical deterioration and there is no functional obsolescence from the manner it is being used, does not necessarily mean that its value is correct. Economic obsolescence may be present in the sense that the market may be demanding less of the product made by certain equipment or machinery. In turn, this machinery and equipment, although it is still in very good condition, will ultimately be worth less.
When an asset for a business underperforms, it is important that all causes for this underperformance be realized. Without understanding the different ways assets experience inutility there is a possibility they will not have a proper fair market value. A market value that is too high will result in taxes that are likewise too high.