Many times new business owners believe that when they go to buy items needed for their business that they can use these as an expense write off for their business taxes. They make huge investments then when they sit down with their Toronto accountant they are shocked to discover that they are only allowed to claim a portion of their purchase as an expense. The actual expense of the item is spread over a number of years depending on the particular item and the tax rate allowable as set by the CRA.
It should be realized that business purchases shouldn’t be made just on the premise of using it for an expense. The item must have some business value. At the same time to understand your business tax situation you should be aware of what your depreciation allowance is for each of your purchases, and what your yearly deduction for this will be which is your capital cost allowance.
When you are trying to determine how an item you are going to purchase is going to be classed from a tax point of view think of how the item will wear out over a period of a few years. This is how CRA views the property and allots the perceived wear of the item as an expense per year. So for example, if you buy a computer then it is perceived as lasting over a period of time, but each year of use reduces its value, so you are allowed to claim that reduction use as an expense for that year as a depreciation expense.
With the multitude of items that each industry could potentially have a need to purchase, the CRA had to group these items into different classifications. Then based on the classification they set the rate for the yearly depreciation.
For example, if you buy a building for your business there is not only the structure itself but all of its components that you will need. These would include the lighting, wiring, or plumbing to name a few. There is also a land component to a building purchase. The building and its components have been placed into a category 1 by the tax department. So anything that falls into this particular category is currently allowed a yearly depreciation of the value at 4%.
Just having a basic understanding of this area of the tax law will make it easier for you to understand why you have to keep good business records. This is one good reason why you may want to make use of quality bookkeeping services. Your bookkeeper has to be aware of which of your business purchases have a depreciation value.
If you are in need of quality bookkeeping services as well as good accounting services then be sure to give us a call here at 416-398-1700.
