Achieving a high tangible net worth is an important feat for individuals and business owners because it's a sign of their financial success. A high tangible net worth also has its disadvantages, perhaps forcing the person or business to take steps to reduce it. In making the decision to reduce net worth, much thought must be given to the legal and moral reasons.
Calculating Net Worth
Tangible net worth is important because it reflects the amount of cushion a person or company has between its assets and liabilities. Tangible net worth is calculated by totaling all assets and subtracting the total amount of debt and intangible assets. Calculating tangible net worth is easier than calculating net worth because the assets are physical items whose values can be more easily determined.
Assets and Liabilities
Tangible assets are those that have a physical presence such as business equipment, physical buildings and cash. A rule of thumb in labeling assets as tangible is determining whether they can be destroyed by a natural disaster such as a hurricane or tornado, fire or other accident. Assets are items that can be liquidated if the individual or company cannot pay its debts. Liabilities include car and property insurance, credit card debt, student loans and mortgages.
One of the reasons some may try to reduce their tangible net worth is to hide assets from the Internal Revenue Service. The IRS looks closely at high net worth individuals and businesses for audits. The reason stems from the IRS’s increasing annoyance with people trying to dodge tax liabilities. Those with high tangible net worth levels may try to reduce their values to avoid drawing the IRS’s attention.
Individuals may attempt to reduce their tangible net worth to protect their assets in the case of divorce. A spouse may be inclined to not reveal a house, boat or money on her financial balance sheets so it cannot be found or taken during a divorce.
People facing lawsuits may also want to decrease their tangible net worth. If the person suing them wants monetary damages, he can access the financial records of the person he is suing. During that search, he can find out about the person’s tangible net worth. To avoid that, the person being sued may reduce assets by selling them off or hiding them.