As your fiscal year-end nears – and for a lot of our clients that momentous date is December 31st – you should be thinking about your bookkeeping and taxes. This can be especially tricky when your fiscal year-end aligns with the calendar year-end. It’s tricky because you also have to balance the holidays, vacation schedules, and your increased orders if your customers rely on you at gift-giving time. Pre-planning for your fiscal year-end could provide you with huge savings immediately at tax time. Thus, persevere to take a look at your books. In particular, consider what depreciable property you could purchase now that will allow you to benefit from capital cost allowance (CCA) ASAP?
Assets, Defined
Allow us to explain. When you hear the word “depreciable property” or “assets” it’s not unusual to immediately think about big machinery. Whereas, us accountants and business counselors want you to think of assets as any kind of machinery, equipment, furniture, fixtures, or other need-or-nice-to-have items that cost upwards of $500 with a life expectancy greater than 1 year. Think machinery, but not just of the assembly line variety; include equipment you use for packaging, mailing and administration. Think about laptops, desktops, tablets, cell phones, scales, mixers, labeling machines, cars, desks, exterior signs, trade show displays, buildings, and commercial property. Your coffee machine might even qualify if you’re fancy like that.
When to Buy
The burning question that keeps a depreciable asset on your year-end shopping list is whether to buy now or next year. There are pros and cons to both. Although, we tend to advise you towards now because you’ll receive a tax deduction sooner rather than later. While you get to spread the deduction out over multiple years (yay!), that first year is always considered a half-year (rats!). This is because the CRA figures you didn’t benefit from your new toy for that whole year. No matter what part of your fiscal year you purchase an asset in, you only get half of the deductible in Year 1. This is why it’s hugely beneficial to make that purchase at the close of your fiscal year rather than the start.
An Example
Let’s pretend you’re buying a laptop:
Let’s say the laptop is purchased for $749.99 before tax. You receive a 55% deductible for computer hardware.
Year 1 deductible comes to $206.25, which makes the book value of the laptop in Year 2 $543.74.
Year 2 deductible comes to $299.06 which makes the book value of the laptop in Year 3 $244.68.
In the first 2 years, you have that laptop, you’ll get $505.26 back in tax deductions. Every asset is categorized with different rates, but the general deductible range is 4%-55%. Lower percentages are applied to the highest-priced assets, like buildings, so your deductible is still beneficial.
Bonus tip: You don’t have to claim your CCA every year. If you don’t owe taxes this year, you may not want to claim the CCA and carry it forward for next year. It pays to plan ahead!
There are other ways you can use asset purchases to your benefit, and these may influence your decision to buy now or buy later. Contact us and find out what else you should be thinking of as your fiscal year winds down.