At a time when many small businesses are doing it tough finding ways to save on your tax bill is essential. Depreciation can lend an unexpected helping hand, writes Bradley Beer, CEO BMT Tax Depreciation.
Navigating the early stages of any new business venture can be hard. With so much to do, becoming familiar with the available tax incentives may be at the bottom of a business owner’s list of priorities. While some tax deductions may be obvious – travel expenses, interest on business loans, operating expenses – others might not be as evident.
Depreciation is a prime example of a hard-to-find deduction. Small businesses that claim depreciation can benefit from a multi-thousand-dollar cash flow boost.
What is depreciation?
Depreciation is the natural wear and tear of property and assets over time. Most things depreciate, but only investors of income-producing property and business owners can claim it as a tax deduction each financial year.
Depreciation falls under two categories:
- Capital works: This is the natural wear and tear of a property’s structure and fixed fixtures and fittings. Capital works deductions can be claimed on things like a property’s walls, doors, windows, stairs and basins.
- Plant and equipment: The easily removable and mechanical assets of a property, categorised as plant and equipment, also depreciate. Some examples include floor coverings, hand tools, machinery and furniture.
A small business owner can claim depreciation on most assets owned and used for the business. If the property is owned by the business, capital works deductions on the property’s structural and fixed elements can be claimed. But if the business is a tenant only, depreciation can still be claimed on the fit-out.
How does depreciation help small business?
Claiming depreciation works the same as any other tax deduction. It ultimately reduces the business’s taxable income, resulting in a reduced tax liability.
What is great about this for small businesses, especially those just starting out, is that it’s a non-cash deduction. Unlike other tax-deductible expenses, such as interest repayment and insurances, the owner doesn’t need to spend any money to claim. This is possible because wear and tear is a natural process.
A tax incentive that small businesses mustn’t forget
The latest Federal Budget announced that temporary full expensing has been extended until 2023. This means any plant and equipment asset a business purchases between 7.30pm on 6 October and 30 June 2023 can be immediately written-off, rather than being depreciated over time.
The small business pool is also available under simplified depreciation rules exclusive to small business entities.
Usually, assets in a small business pool depreciate at an accelerated rate. But this changes while the instant write-off, such as temporary full expensing, is in place. Instead, if the balance of the pool is less than the write-off’s threshold, its entire balance can be written off. Now that full expensing has no threshold, it essentially means any small business pool balance can be written-off.
Confused? Here is an example:
Kaitlyn is a small business owner, operating a restaurant. She has several assets allocated to her small business pool including floor coverings, catering vans, commercial kitchen appliances, furniture, air-conditioning units and office equipment.
At the end of the 2020-2021 financial year, the balance of Kaitlyn’s small business pool was $160,000. With temporary full expensing, she could write-off the entire balance, resulting in a full tax deduction of $160,000.
How can small business owners start claiming depreciation?
The first step is to get in touch with a quantity surveyor who specialises in tax depreciation and can prepare a tailored, industry-specific tax depreciation schedule.
A tax depreciation schedule is essential for claiming depreciation accurately. It outlines every depreciable item owned by the business and outlines the yearly depreciation deduction available.
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