The accelerated capital cost allowance in Budget 2015 gives manufacturers the ability to deduct approximately 90% of the cost of equipment from income in four years as opposed to seven years. The end result is higher deferred taxes and more cash in your pocket at the end of the tax year. The goal of the program is to get manufacturers to feel safe when investing in equipment for larger or longer-term projects.
The Accelerated Capital Cost Allowance Under Economic Plan 2015
Canada’s Economic Plan 2015 allows you to use a 50% rate on a declining-balance basis for capital assets acquired after 2015 and before 2026. To put it another way, the accelerated capital cost allowance allows costs to be deducted at a faster rate than the standard capital cost allowance. In most cases, more than 90% of your equipment purchase is deducted after only four years. It would take seven years without the accelerated allowance. According to the Canadian Revenue Agency, more than 28,000 businesses took advantage of a similar incentive from 2007 to 2014. The accelerated capital cost allowance is expected to reduce taxes for manufacturers by $1.1 billion from 2016 to 2020.
The Impact of the Accelerated Capital Cost Allowance on Net Income and Cash Flow
Depreciation is one of the best ways small business owners can defer taxes. For example, if you buy a machine for $100,000, you can depreciate the cost over the machine’s useful life. This allowance lets your business report lower income, which decreases your tax obligation. Depreciation is a non-cash expense; it’s deducted from net income, but no cash exchanges hands. Most companies use the straight-line method to calculate depreciation expense. The straight-line method is the same amount every year. If you calculate depreciation expense as $10,000 using the straight-line method, you deduct the same amount each year until the full cost of the equipment is written-off. The accelerated capital cost allowance program is really an accelerated depreciation program. It lets you deduct more of the value of the asset in the beginning of its useful life. So, using the same example, you can deduct more than $10,000 in the beginning of the asset’s useful life and less in the end of its useful life. Accelerated depreciation doesn’t just accelerate write-offs on expensive equipment; it accelerates deferred taxes, which puts more cash back in your pocket at the end of the tax year.
Accelerated Capital Cost Allowance Examples
Suppose a manufacturer of automobile products purchases $250,000 in equipment. The accelerated capital cost allowance allows the automobile manufacturer to deduct $57,250 more of the equipment in the first three years of the machine’s use than it does under the standard rate. Another example is a production plant with plans to purchase $4 million in new machinery. The accelerated capital cost allowance lets the company deduct $916,000 more of the cost during the first three years than it can under the standard capital cost allowance. The resulting tax deferral is $137,400. Running a manufacturing business is hard enough, especially when it comes to cash flow and profitability. Using the accelerated capital cost allowance gives more cash back to your company. You can then use that cash on other value-added projects, such as marketing, promotions, and training.