Tax savings.  Music to your ears?*

For many it is, and for those there is some good news in yesterday’s Federal Budget, especially those in small business.

In recent years, small businesses have been able to get an immediate tax write off on asset purchases of up to $25,000.  That has now been increased to $30,000 and it now includes medium sized businesses with annual turnover of up to $50 million.  So, if you are in business, and you need that special piece of equipment or a new vehicle, now might be the time to act.  And, if cash for the purchase is an issue, then we can help you get a loan.  Basically, we can get a loan for the purchase of anything that can be identified with a serial number.  Having that asset as security for the loan makes it possible to get a much better rate, and you don’t need to tie up property as a security.

So, what are the important matters for your business to consider regarding this:

• Getting the entire tax deduction this year will move forward cash flow from future years to the present year.  So instead of depreciating the asset over its life, you write it all off in one year.
• Applying all of the expense to one year may reduce the profits shown on the books for this year.  Instead of having a percentage of the cost of the asset shown as a depreciation expense, you have the whole amount shown as an expense.  This could make the business appear to be less profitable.  However, in subsequent years it will look better.  Generally, if someone is examining your books for a loan or other purpose, they will make adjustments for such things, so that it has no negative impact one way or the other.
• Not having to pay as much tax for this year will improve cash flow at the time that you are paying tax for this year – perhaps a year from now.
• Having slightly higher profits in following years may mean that you have to set aside a bit more for tax then.
• The time value of money would indicate that it is better to have the money in your pocket now, rather than some years in the future.  The present value of a dollar saved five years from now is just 88 cents, based on 2.5% inflation.  And it’s a lot less than that if your business is able to get a larger return on that dollar by investing it.  If you are able to generate a 10% return on capital, then it’s only worth 62 cents today.  Far better to invest the full dollar today and get the potential of its return.  It then becomes worth $1.61 in five years!
• A basic principle when it comes to tax savings is that you don’t go out and buy something you don’t need just to pay less tax.  However, if there is something that you need, that can enhance your business, then it makes sense to purchase it in a tax-effective manner.

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