When you start your own business, you typically invest some money into tools or supplies. If you already own some of the items you need, you can save yourself the money, time, and effort involved in shopping by switch the items from personal use to business use. The Canada Revenue Agency (CRA) even lets you declare the value of those items as a business expense. To illustrate how the process works, imagine you want to use your personal vehicle for business purposes.
Assess Fair Market Value
When you turn personal assets into business assets, you need to assess their fair market value (the value of each item if it was sold in the marketplace). To assess the fair market value of your car, you could:
- Look at prices of the same type of vehicle on a used car site
- Use the Black Book value of the vehicle
- Talk with a dealer about the trade-in value
Based on that type of research, imagine that you determine the fair market value of your vehicle to be $10,000.
Understand Business Versus Personal Use
If you plan to use your vehicle exclusively for your business, you should use its fair market value when determining your business deduction. On the other hand, if you plan to use your vehicle for both business and personal use, you should only use a portion of its value to calculate your deduction.
With items such as office furniture, computers, or tools, you can simply estimate the portion of time you use the item professionally and personally. For example, if you use your computer half the time for work and half the time for play, 50% of its value is a business expense.
With a vehicle, you need to keep detailed records to determine the portion used for the business. Most self-employed people handle this task with a simple mileage log. To explain, suppose you drove your vehicle 20,000 kilometres total over the year, and 5,000 of those kilometres were for business. In this case, you can claim 25% of the vehicle’s fair market value, or $2,500, as a business expense.
The vehicle is a capital expense, and that means you can’t write off the $2,500 right away. Instead, you need to write it off incrementally over a few years.
Determine Capital Cost Allowance
The fair market value multiplied by the portion of business use is your undepreciated capital cost. Once you have determined the undepreciated capital cost of your asset, you need to figure out which class your asset is in.
The CRA maintains an extensive list of asset classes to help you. Most vehicles fall into class 10, which has a capital cost allowance rate of 30%. In the first year of use, that means you can claim ($2,500 x 30%), or $750, as a business expense. There is a chart on Form T2125 that walks you through these calculations. After you claim the initial $750, you get to save the remaining part of your $2,500, or $1,750, as a deduction for the following tax years.
The CRA requires taxpayers to keep all records for six years. If you’re self-employed, you need to keep records and receipts of all your business transactions. In cases where you transfer personal assets to your business, it’s a good idea to keep information on how you determined the fair market value of the asset, and you may also want to keep records on how and when you used the asset for work.
Using personal assets for your new business can help reduce your startup costs. If you claim the transaction on your tax return, that can lower your business income and reduce your tax liability. This process applies only to independent contractors and self-employed individuals. If your business is a partnership or a corporation, you can still transfer personal assets, but the process is slightly different.
As a small business owner, you want to keep as much money as possible in your pocket while filing an accurate return. QuickBooks Online can help you maximize your tax deductions. Keep more of what you earn today.