Residual value has several meanings, each with its own potential tax consequences. Tax laws vary between jurisdictions, so taxes on residual values vary as well. Generally speaking, residual value is taxable whenever it represents a net gain in an economic transaction. For example, residual value is taxable if a company sells an asset for a profit or if a car lessee purchases a vehicle at the end of the lease.
Meanings of Residual Value
The most common accounting usage of residual value is the asset's cost less any allowable depreciation. Though sometimes conflated, this residual value is not identical to scrap value, or salvage value, which equals an asset's proceeds minus any disposal costs.
Another possible meaning of residual value involves leased assets, such as a car. In these cases, residual value represents the leased object's fair market value after the term expires. Leased value can be guaranteed or nonguaranteed.
Taxation of Residual Values
Residual value and salvage value are both taxable in some cases. This occurs whenever these values have not been considered for depreciation. In this case, the assets eventually have a book value of zero at the end of their useful life. If a company sells an asset with a residual value greater than its book value, the company has to pay taxes on the profits of the sale. For a leased asset, residual value often forms the tax base if the lessee decides to purchase it after the lease terms end. Sales tax laws vary from state to state, but it is not uncommon for the sales tax to be assessed based on residual value.