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How to Deduct: Technology and Equipment Deductions and Capital Cost Allowance

When you replace or upgrade your company’s technology, it comes at a cost. The Canadian Revenue Agency (CRA) allows you to claim these costs as deductions on your taxes, which reduces your tax bill. Different technology purchases qualify for different types of deductions. Before you fill out your tax returns, it’s a good idea to classify each purchase based on CRA rules.

What Types of Technology and Technology Services Qualify for a Deduction?

You can claim a deduction on any technological device or service that you use for your company, including:

  • Televisions
  • Computers
  • Tablets
  • Smartphones
  • Internet
  • Phone service
  • Cable subscriptions
  • Apps

To qualify for a deduction, the equipment and services must relate directly to your business. If you buy a smartphone or tablet for work, you can deduct the purchase price. Do you use paid smartphone apps for work? You can also deduct those costs. The deduction also applies to subscriptions: If you’re a freelance writer who reviews television shows, for example, your cable subscription is a reasonable business expense.

If you use your work devices for personal reasons, however, you can only write off part of the expense. To figure out the percentage you can deduct, count the number of hours per day that you use the device for work. Then, divide that number by 24.

Imagine that you have a television that you use for eight hours per day for work. The rest of the time, you use it as a personal television. In that case, divide 8 by 24 to get .33 — this is the percentage of expenses (33%) that you can write off. If you bought the television for $1,000 and you pay $100 a month for cable, you can write off $330 for the purchase and $33 per month for expenses.

Classifying Your Technology as a Current Expense vs. a Capital Expenditure

You can deduct your technology expenses in two ways: as a current expense or as a capital expenditure. Current expenses are costs you pay for immediate use, like internet service or in-app purchases. The CRA allows you to deduct the full cost of these items in the year of purchase.

Capital expenditures, on the other hand, refer to purchases that you use in your business for more than one year. This category usually includes items such as computers, projection systems, and cameras. For these purchases, the CRA requires you to capitalise the cost and deduct a portion of it each year that you use the item. Other items in this category are:

  • Commercial scanners
  • Copy machines
  • Large-format printers
  • Servers

Choosing the Correct CRA Business Deductions for Technology

Sometimes, it’s tough to decide whether your technology purchase qualifies as a current expense or a capital expenditure. The CRA doesn’t have a hard and fast rule for the type of technology deduction you choose, so it’s up to you to track your expenses and classify them.

If you’re buying a device to use for multiple years, it’s usually a good idea to capitalise on the cost. This often applies to high-priced items such as computers or servers. Some types of technology, such as smartphones and apps, change quickly – do you expect to upgrade to a newer version in a year or less? If so, it’s a good idea to claim the cost as a current expense.

The nature of your business also affects how you deduct technology. Imagine that your field technicians use laptops in harsh environments, so the laptops probably wear out faster than they would in an indoor office. In this situation, you might be able to claim laptop costs as a current expense. Make sure that your choice is reasonable: As long as you can justify your decision, the CRA usually accepts it. When in doubt, consult with the CRA or your tax advisor before filing your taxes.

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Depreciation and Deducting Capital Cost Allowances

If your technology counts as a current expense, you can simply deduct the full cost from your net income at tax time. When it comes to capital expenditures, things are a bit different. For this type of technology cost, you must follow the CRA’s rules for the capital cost allowance deduction. The capital cost allowance deduction relies on the concept of depreciation, or the percentage of value a device loses each year due to normal wear and tear. Imagine that you buy a tablet. As you use it, the screen gets scratched, and the battery loses some of its power. This means that it’s worth less money.

You don’t have to figure out depreciation percentages yourself - the tax law provides them for you. You can simply choose the correct category to find the percentage. Multiply that percentage by the cost of the item to find out how much of a deduction you can take.

Keep in mind that the rules are slightly different for the year after you purchase a device. In that first year, you can only deduct half of the CRA rate. You can also opt out of the capital cost allowance deduction. That means that if you don’t need the deduction during any given year, you can simply carry it over to the next year. This rule gives you the freedom to take deductions when you need them most.

Depreciation Categories for Computers and Electronics

The CRA places electronic equipment in different capital cost allowance categories. Since technology is constantly changing, there’s room for interpretation. Some common categories are:

  • Category 8 (20 percent depreciation): Photocopiers, fax machines, and telephone equipment. This includes mobile phones but probably not tablets.
  • Category 12 (100 percent depreciation): Computer application software. This includes frequently used software, such as Microsoft Office and other similar programs.
  • Category 46 (30 percent depreciation): Data network infrastructure equipment that supports advanced telecommunication applications. This category is used for routers, server infrastructure, firewalls, and other common hardware.
  • Category 50 (55 percent depreciation): This category is the general-purpose computer equipment category. If you can’t classify an item in another category, you can use this category. This category includes desktops, laptops, tablets, monitors, and printers, along with operating software.

Technology purchases are a crucial part of business. By claiming these costs as deductions on your annual tax return, you can pay less in taxes. QuickBooks Online can help you maximize your tax deductions. Keep more of what you earn today.

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