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Building the instant tax deduction into your business plan

With the 2014-15 financial year at an end, business owners should now be planning for a tax regime that includes a $20,000 instant asset depreciation.

Since the government’s introduction of an instant tax deduction on up to $20,000 of capital items in the May budget, business owners should integrate the new rules into their cash flow and tax planning.

The instant deduction gives business owners the ability to claim the total amount of a capital purchase up to $20,000 in one go as a tax deduction. Business owners no longer have to depreciate capital purchases with a schedule or claim partial deductions over a period of four to five years. This essentially means that an owner can bring forward deductions where they wouldn’t otherwise have been able to do so.

When building the deduction into their planning, business owners should only make capital purchases if they are productive assets. If assets do not contribute to the production of revenues, they are unlikely to be eligible as business deductions.

Owners must also understand the actual benefit of the purchase in both a cash flow and taxation sense. If they run at a loss, then the instant deduction is not very useful. The instant deduction reduces the amount a business owner is taxed on. If owners are not in profit, they can carry forward some losses but then the effect of the instant deduction is gone.

Business owners planning for this year must also be aware that the instant deduction does not apply to plants or capital works such as construction. Owners should consult their accountants rather than making assumptions in regards to this.

Business owners must know exactly what the tax benefit is if they are using the rule changes to make a purchase decision. If used wisely, the instant deduction can be a real benefit to profitable small businesses that were planning on purchasing assets. But it is best for owners to speak with their accountant to be sure.

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