No matter the size of your business or the industry you operate in, chances are you own assets that help you earn an income and stay on top of day-to-day operations.
Depending on where your business files taxes, you may be able to deduct the purchase cost or the decline in value of these assets from your taxable income, effectively reducing your tax bill.
This article covers the essentials of tax relief on capital assets, also known as capital allowances.
In a nutshell, capital allowances enable you to reduce your taxable income by accounting for the capital assets you use for your business.
Capital allowances can typically be claimed on capital expenditure for tangible and intangible assets, including equipment, vehicles, property, research and patents.
There are two main ways capital allowances are treated:
In the UK and Ireland, the original cost of an asset can generally be claimed as a capital allowance. Some assets can be deducted in full in the year the expenditure was incurred, while others are spread over several years.
Example:
Let’s say a plumber earns $80,000 in one financial year and buys a $30,000 vehicle that is eligible to be claimed in full as a capital allowance. In this case, he can claim a tax deduction of $30,000, bringing down his taxable income to $50,000. However, he can’t claim any further deductions for the cost of the asset after that year.
In many countries other than the UK and Ireland, you generally can't deduct the full cost of capital assets immediately. Instead you claim the cost over time based on the asset's decline in value (or depreciation).
Example:
Let’s say a plumber earns $80,000 in one financial year and owns a work vehicle that declines in value by $7,000 in the same year. In this case, he can claim a tax deduction of $7,000, bringing down his taxable income to $73,000.
The following financial year he earns $70,000 and his vehicle declines in value by $6,000. He can then claim another deduction of $6,000, bringing his taxable income down to $64,000.
Capital allowances vary from country to country, but some of the most common ones include:
It’s worth noting that different types of assets can be treated differently for tax purposes. This means you could be able to claim the full cost of one type of asset in a single financial year, while you might have to spread the cost of another asset over multiple years.
It’s always a good idea to check with a tax specialist to make sure you understand the ins and outs of capital allowances for your business.
Capital allowances can be a bit of a tricky topic, but understanding the nitty-gritty can help you make sure your business is as tax-efficient as possible. Some of the benefits of claiming capital allowances include:
With QuickBooks Online, you can quickly and easily record capital expenditure in your chart of accounts so all your capital assets are together in one place. You can also automatically track depreciation of assets purchased, to stay on top of decline in value.
Find out more about how QuickBooks Online can help you save time, stay on top of your finances and grow your business.
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