As a business owner, you may have heard the term “capital asset” before. However, are you aware of what capital assets are – and how they can help your business? Find out below.
What Are They:
Capital assets are significant pieces of property for the business that are purchased for company use (not purchased to be sold) and have a useful life longer than a year. Common examples of capital assets are buildings, cars, investments, equipment, furniture, art and leasehold improvements. All these assets bring value to your business and are handled differently in the accounting world than an expense.
Capital assets are recorded on the balance sheet, not profit and loss statement. Although capital assets are not expensed, there are expenses associated with them.
Expenses Associated with Them:
Amortization is capitalizing a capital asset over time, which becomes an expense. Amortization is recorded by CRA’s standards, in which capital assets are broken up by classes (CCAs) and it is then determined how much amortization can be expensed each year. Amortization is recorded on Schedule 8 on your T2 for corporations, or T2125 if you are self-employed. Amortization does not need to be recorded every year; therefore, you can strategize with your accountant as to when it is best to claim it.
Capital expenditures are expenses associated with the capital asset. For example, a vehicle in the company name is the capital asset, but repairs on that vehicle are considered the capital expenditure. In order to be recorded as a capital expenditure, the expense must improve or enhance the value of the asset (ie: repairs to the company vehicle versus fuel). Adding to the value of an asset can increase your amortization.
How They Can Help:
To reduce your tax liability, you can purchase capital assets. These purchases would decrease your revenue and decrease your corporate taxes owing. In addition, recording amortization would increase your expenses and decrease your corporate taxes owing. If it is close your fiscal year-end and your company requires additional furniture, equipment or other capital assets, it is more beneficial to make those purchases before the end of the fiscal year to reduce your taxes. As well, you can wait to claim amortization until a year in which your corporate taxes owing is high, to decrease them.
It is important to note with capital assets, in order to claim them as such, they must be purchased in the company name. As well, extensive records must be kept of the purchase of the capital asset, as well as the expenditures. These records will also help the accuracy of the amortization.