As a small business owner, you get to lower the amount of taxable income on your tax return with the capital cost allowance when you make certain purchases during a tax year. Capital purchases occur when you buy items with a useful life of more than one year, such as computers, vehicles, equipment, and buildings.
What Qualifies as Capital Cost Allowances
Certain expenditures added together comprise your company’s capital cost allowance. Items that qualify for as CCA include:
- Property purchase prices, excluding land since it isn’t depreciable
- Fees relating to buying or constructing property that don’t apply to land
- Costs of property additions or improvements after acquisition
- Soft costs related to time spent constructing, renovating, or altering the property
Note that fees that apply include your part of accounting, engineering, installation, and legal costs. Also, you can’t claim anything in capital cost that you claim as a current expense. In most instances, you use the declining balance method to figure your capital cost allowances. This method lets you claim capital costs minus capital cost allowances you claimed in previous years.
Find Capital Classes of Your Items
The CRA requires you to break down your purchases into capital classes to determine the amount you can claim. This lets you deduct a percentage of the value of your items, depending on the type, or class, of item you have on hand. For example, buildings fall into class one, which means you can deduct 4% of their depreciated value. Office furniture and expensive tools fall into class eight, which means you can deduct 20% of their depreciated value.
Preparing a list of all your capital purchases made in the current tax year makes it easier to calculate your capital costs. This simplifies the process of comparing those capital costs against Areas A through F and Charts A through D on your Form T2125 and fill in each column as prompted. Instructions below or within each chart tell you how to fill in the calculations, or you can use tax software such as QuickBooks Online for automatic calculations.
Calculating Capital Costs
To perform a capital cost allowance calculation, use the instructions on Form T2125 to total your listed purchases. Keep in mind that you can omit deductions from your current year’s return if you’d like to save them to use on a future return. This proves a good option if you expect your taxable income to rise in future years.
The capital cost allowance tax deduction offers a valuable write-off on your business tax return, especially if you buy property that decreases in value over time. QuickBooks Online gives you a way to track expenses while helping you find ways reduce your tax bill. QuickBooks Online can help you maximize your tax deductions. Keep more of what you earn today.