BLOG - Should you spend $20,000 to get a tax deduction?

Kathryn Harris, CPA, CTA

Remember - it's a deduction, not $20K in your pocket.

BLOG - Should you spend $20,000 to get a tax deduction?

In the latest budget the federal government announced and instant write off for assets costing $20,000 dollars or less. This isn’t the first time this has been available, the previous government had a $6000 write off available.

So what does it mean for you and your business?

If you buy and start to use an asset in your business after 7.30pm on the 12 May 2015 and before 30 June 2017 that costs less then $20,000 you will be able to claim the whole amount as a deduction. Also, if you use the small business asset pooling rules and the pool balance is less the $20,000 you can claim the whole amount as a deduction.

The important thing to remember is it is a deduction – you won’t get a refund of $20,000! The most tax you can save using this measure is $9,800 – and that is if you as an individual are on the highest tax bracket. For most businesses the tax savings are more likely to be around the $6,600 mark.

Still not to be sneezed at and if you have a tax problem and need new equipment definitely worth taking advantage of.

Another point to remember is that this is accelerated depreciation. Businesses have always been able to claim a deduction for assets but it has been spread over a number of years.  As an example a car is claimed over 8 years if it isn’t pooled, about 4 years if it is. This measure brings all those deduction into one year. Instead of getting the tax benefit over the lifetime of the asset you get it all up front.

Do you have to buy an asset that costs less than $20,000 to get this tax deduction?

If you want the deduction for the 2015 year then yes you do, because the measure is available until 30 June 2017 and includes the ability to write off the pool balance if it is less than $20,000 you can spend a bit more and get the write off in the next 24 months.

For example:

Brian purchases a ute costing $28,000 to use in his business. His accountant suggests he pools his assets to claim the higher depreciation. He has $4000 in assets before purchasing the ute.

 

Year 1 - 2015

Opening pool                         $0

Additions                                $32,000

15% Depreciation                 $ 4,800

Closing balance                     $27,200         

 

Year 2 – 2016

Opening balance                   $27,200

30% Pool Depreciation        $ 8,160

Closing balance                     $19,040

 

Year 3 – 2017

Opening balance                   $19,040

Write off                                 $19,040

Closing balance                     $0

 

This is just an example and obviously considers that no other assets are purchase in the time period.

Lastly the most important consideration is can your business afford to spend $20,000? Although you may have a profitable business with a tax issue it doesn’t necessarily to translate to having cash to throw around. This measure applies even if you finance the purchase.

If you think this deduction could be helpful in your business, make an appointment to come in and have a chat.

 

 

 

 

 

 

 

 

Kathryn Harris, CPA, CTA