Accounting and Tax Treatment of Computer Hardware and other Fixed Assets

Investment in capital items such as computers, furniture, equipment and cars can cause confusion for small business owners.  Since these are purchases that affect the cash flow of the business, it seems that they should be accounted for as expenses just as you would reflect office supplies or rent.  There are however special rules for any acquisitions that qualify as “fixed assets”. 

A fixed asset, simply speaking, is an acquisition that provides a long term economic benefit to the business. In other words, any business purchases that has a useful life that extends beyond one year, will usually qualify as a fixed asset. 

From an accounting perspective, fixed assets as their category implies, are reflected as assets on the Balance Sheet.  This means that they when they are initially entered into your accounting system, they will have no immediate impact on your bottom line.  It is only with the passage of time that a portion of these costs become an expense, which requires an assessment regarding the useful life of the asset.  For example you might purchase some computer hardware that you expect to use for about 3 years after which you will need to replace it.   At the end of the 3 years, however, it may still have some value (you may be able to sell it) which is referred to as salvage value.  This too needs to be evaluated.  Once these factors are determined (since you are not psychic, they do not have to be exact – just reasonable) you have enough information to calculate your depreciation expense.  The depreciation expense is the amount by which you reduce your fixed asset value on an annual basis. 

Read More

3 Provisions from the 2011 Federal Budget that Benefit Small Businesses

Although the 2011 federal budget tabled in March was not directly responsible for an election, a change in government and one of the most interesting election results in recent history, it was certainly a contributing factor.  When the excitement was over however, the budget pretty much remained the same.  The budget’s primary focus is the economy and includes provisions to stimulate jobs and growth, while, for the most part, maintaining current tax rates.  Some provisions that impact small business are discussed below:

Temporary Hiring Credit 

A one-time credit of up to $1,000 based on the increase in an employer's employment insurance (EI) premiums paid for 2011 over those paid for 2010. 

Small businesses whose EI premiums were less than $10,000 in 2010 and whose premiums increased in 2011 from 2010, are eligible for a one time credit.  The credit will be automatically calculated when you submit your T4s and summaries for 2011.  The deadline, to be eligible for the credit, is January 15, 2015 (if you haven’t filed your T4s by this time, you probably have bigger problems). 

Note that you cannot reduce your payroll deductions by the amounts anticipated.  You must wait for the CRA assessment subsequent to filing your T4 returns.

Further info can be found here

Read More

Tax Tip: Write Off 100% of Computer Hardware

Small Business owners should note that for electronic data processing equipment i.e. computer hardware and related software acquired between January 27, 2009 and January 31, 2011, the entire amount of the purchase can be deducted against income.  This is a significant incentive for business owners to purchase computer equipment before February, 2011.  The accelerated depreciation rate is 100%.  and there is no half year rule.  The usual CCA rate for computer hardware, which is subject to the half year rule (i..e 15% in the first year) is 30%.   To qualify the hardware must be:

  • situated in Canada
  • new equipment
  • used by a business that is conducted in Canada

The applicable CCA Class to select when preparing your tax return is 52.

More information can be found at the CRA website Classes of depreciable property:

Related: Accounting and tax implications of fixed assets 

About the author: Ronika Khanna is an accounting and finance professional who helps small businesses achieve their financial goals.  Please sign up to receive articles pertaining to small business, accounting, tax and other occasional non business topics of interest.  You can also follow her on Facebook or Twitter.