Tax Break for Small Business

The $20,000 accelerated depreciation provision in the 2015 Federal Budget is a dream come true for many CX readers who buy equipment. The provision allows you to buy as much as you like, provided no one item of equipment is valued at more than $20,000. With most moving lights, line array elements and screens costing well under 20 grand, the doors are now open.

Business funds capital expenditure (capex) one of three ways. Loans work well where they are available, and provided there is the work to pay them off. Capitalization is fine too where the owner has the cash to invest to buy gear. Spending profit to expand is the most common way to buy equipment, and it came with a nasty tax sting – until now.

I started a lighting company that grew every year. We were profitable but cash poor – all our earnings went into more equipment. Then the annual returns were prepared well after June 30, usually at the last minute, around Christmas. Suddenly the accountant would be on the phone telling me that last year we made 100 grand (which we spent on gear), so the tax would be 40 grand, due and payable now! Then he took off the depreciation for the 100 grand of gear, which back then was just 20%. Our tax bill was still a shocker, at $32,000.

If this new provision were in effect, we would have spent that 100 grand and reduced our profit to zero, provided each item we purchased was worth 20 grand or less.

The provision applies to ‘small business’ that turn over less than 2 million. That accounts for most of us. If I were larger than that I’d split up my company and create a new one, as an equipment management company that buys everything new and rents it back to myself. Prima face this appears very legitimate, as there has been no notice of rules to prevent doing so. In any case, there is a lot of scope to legally exploit this new opportunity.

Equipment importers will be rubbing their hands and getting down to it, since the provision is now in effect, and there are six glorious selling weeks until June 30. I would imagine some – er – creative arrangements will be created, and some small businesses will switch from cash accounting to accrual accounting to push back the actual ‘payment’ for the newly acquired equipment.

The provision will run until June 2017, which makes it all the sweeter.

As always, don’t take my word as golden, talk to your accountant before actually doing anything ‘creative’. Otherwise, spend, spend, spend today. Bugger tomorrow!