Will The $20,000 Write-off Work For You?
If you don’t really focus on the tax and bookkeeping end of your business, you might not be aware of a proposal that will allow small business owners to take an immediate tax deduction of $20,000 for most of their capital purchases. This is in stark contrast to the $1,000 limit for last year, which was a reduction from the prior $6,500 limit.
Currently, the $20,000 write-off is only a proposal in the 2015-16 Federal Budget, and it will still need to be voted on and passed in the Senate to go through. While some details remain unclear, it is expected to pass quickly and be available immediately and run through June 30, 2017.
Currently, the deduction would apply to assets that are new or second hand, and can also be applied on a per asset basis. This means that you could conceivably have more than one asset that costs up to $20,000 to qualify for the write-off as long as they are installed and ready to use before June 30, 2017.
Assets that cost $20,000 and over can still be depreciated at 15% in the first year and 30% each succeeding year using the small business simplified depreciation pool.
What the write-off means for you
What this means for small business owners is that not only will you be able to depreciate capital items on your taxes more quickly, you should also receive a healthy injection to your cash flow in the form of a lower tax bill.
While you wouldn’t want to go out and make a large investment just to be spending the money, if you’ve been putting off some much needed upgrades, this write off might be just the incentive that you need to follow through and make those purchases that will help you upgrade and improve the service you offer your clients.
Exceptions to keep in mind if you plan to claim the write off
Of course, there really isn’t such a thing as “free money”, or a “free lunch”, and these old axioms certainly apply to this $20,000 as there are some exceptions to being able to take the write-off. The most important one being that you must be operating as an actual small business to qualify for the write-off. It’s not enough to have a current ABN, you will need to show that you are an ongoing concern and operating as a small business to take the deduction. According to the Australian Tax Office (ATO), most small businesses that earn less than an aggregate of $2 million per year can be officially classified as a small business entity, and you can use your figures from last year to determine your classification.
Since you must be able to prove that you are an actual ongoing business, you might also have difficulty deducting certain business losses after you take the write-off.
You will also want to take into consideration whether or not you have an actual place of business or if your home office is merely for convenience if you plan on taking advantage of the write-off. The usual rules will apply when it comes to apportioning the costs between personal and business use for your business location.
Keeping up with the paperwork
Make certain to get and keep your receipts for any capital purchases that you do make, whether or not you plan to claim the $20,000 write off. While almost any asset up to $20,000 can be claimed on the write off, there are some exclusions. These exclusions include purchases for horticultural plants, software and other similar assets that are allocated to a special low depreciation pool, capital works that are subject to their own special depreciation rates, assets that are leased to others on a depreciating lease, and primary production assets since they can be depreciated using UCA rules or accelerated depreciation.
Keeping all of the exceptions and exclusions in mind can be a bit difficult when taxes and books aren’t the main focus of your business, so if you would like more information about the write off and its potential implications for your business, don’t forget to get in touch with us. We’re here to help you make the best decisions for you and your business!
What investments will you make?
Now that you know a bit more about the upcoming $20,000 write off, do you plan to take advantage of this opportunity to reduce your taxes and increase your cash flow by making an investment in your business? If so, you are certainly not alone in this decision! According to a recent survey in the online publication Smart Company, nearly 75% of all small business owners plan on taking the $20,000 write off, with most planning on using the deduction to purchase an upgraded computer system or vehicle for their business.