This picture has nothing to do with this post. It’s just another view-from-my-office photo.
Are you thinking of buying new photo gear or other expensive business items? If so, December offers a couple of tax benefits.
Many businesses, especially sole proprietorships, have their fiscal year match the calendar year because it makes doing your income tax easier. If this describes you then December purchases might be beneficial.
Lower Your Taxable Income
Most photo gear is depreciated on your income tax through Capital Cost Allowance (CCA).
Unlike some other countries, Canada doesn’t use straight-line depreciation which is the easiest way to depreciate something. If you buy a $5,000 camera and it’s depreciated at 20% per year then, with the straight-line method, you would deduct $1,000 per year for five years.
Canada Revenue Agency uses the diminishing balance method of depreciation. If you buy a $5,000 camera and it’s depreciated at 20% per year (CCA Class 8), you would deduct $500 in the first year (due to the half-year rule for the first year), $900 in the second year, $720 the third year, $576 the fourth year, then $460, $369, etc., in the following years.
The reason for the half-year rule is that, many years ago, businesses often made large purchases at the end of the year and claimed a full year’s deduction. The federal government got wise to this and introduced the half-year rule. You can deduct only half the allowable rate in the year of purchase for most items.
If you’re planning to buy expensive camera gear or other big ticket items sometime in the near future, it’s usually better to do it in December than in the new year.
A $5,000 camera bought in December 2019 will lower your 2019 taxable income by $500. You can then claim a 20% deduction ($900) for the 2020 tax year. But if you wait and buy your $5,000 camera in early 2020, you’ll get no deduction for 2019 and only 10% ($500) for the 2020 tax year.
Technical note: the “first year” deduction is the year when the item became available for use. Often the year of purchase is the same as year available for use. But if you buy something in December 2019 and you receive it in January 2020, then the year available for use is 2020.
Computers and Small Tools
Computer equipment (“general-purpose electronic data processing equipment”) is depreciated at 55%. If you buy a new computer before year’s end, you can deduct 27.5% of its cost this year and 55% (declining balance method) next year.
Small tools under $500 have a 100% depreciation rate and no half-year rule. If you buy before year’s end, you can claim 100% this year.
HST/GST Credit
Making business purchases near the end of your quarterly HST/GST period, like the end of December, means that you will get the sales tax credit sooner. If you buy near the start of a tax quarter, you must wait about 3-1/2 months for the credit. But if you buy at the end, you wait about three weeks. This can be helpful if you make a large purchase on a credit card and need the sales tax refund before your credit card bill comes due.
Make Smart Business Decisions
Don’t rush out and buy something just because it’s the end of the year. Only purchase an item if it will earn you more money or you need to replace a piece of gear. Buy because it’s a smart business decision not because you want something new.
Be sure you can afford the purchase. Buying expensive items on credit might mean that the interest charges will exceed the tax benefit.
Remember that spending $1000 does not save you $1,000 in tax. It reduces your taxable income by $1,000 which may save you a hundred to a few hundred dollars in tax depending on your income bracket.
Please check the date of this article because it contains information that may become out of date. Tax regulations, sales tax rules, copyright laws and privacy laws can change from time to time. Always check with proper government sources for up-to-date information.
