The small business entity simplified depreciation rules help business owners maximise their cash flow each year.
Despite being available, many aren’t taking advantage of the simplified depreciation rules or depreciation in general. This means they are missing out on thousands, sometimes tens of thousands, of dollars when lodging their tax return.
In this article we will explore:
- What is small business entity simplified depreciation?
- What is a small business entity?
- Choosing the simplified rules
- Instant asset write-off for small business entities
- Understanding the general small business pool
- Small business and the Backing Business Investment incentive
- What happens when a pooled asset is sold or destroyed?
- What happens when a business becomes ineligible?
- A tax depreciation schedule is essential for any business owner
What is small business entity simplified depreciation?
Depreciation is the natural wear and tear of a building and its assets over time. Business owners and property investors can claim depreciation as a tax deduction.
A small business can either use the simplified or general depreciation rules. The simplified rules allow small business owners to claim depreciation deductions sooner.
The simplified depreciation rules include:
- Instant asset write-off
- General small business pool
What is a small business entity?
Determining whether a business is a small entity depends on the business’s aggregated turnover, not geographical location or number of staff.
To use the simplified deprecation rules, the business must have an aggregated turnover of $10 million from 1 July 2016 onwards, or, $2 million for previous income years.
Choosing the simplified rules
Before we dive into more detail, it’s important to note that eligible businesses can choose whether to use the simplified rules.
Businesses that choose to use the simplified rules must:
- Apply the rules to all depreciable assets, apart from those excluded. Some common excluded assets include horticultural plants and assets that are leased out more than 50 per cent of the time.
- Use the complete set of rules. Businesses can’t ‘pick and choose’ what they do and don’t use.
- Only claim the business-use portion of the depreciable asset. This means the portion that is used for non-taxable purposes such as private use can’t be claimed.
Instant asset write-off for small business entities
The instant asset write-off threshold is bigger than ever before. Under the current incentive, businesses can write off any eligible plant and equipment assets valued up to $150,000 until December 2020. The deadline has many businesses rushing to take advantage of the incentive, but not all small businesses.
From 1 January 2021, only small businesses can take advantage of the instant asset write-off. The threshold will decrease to $1,000, but with no limit to the amount of assets that can be claimed in one year, this can still boost cash flow by thousands.
Understanding the general small business pool
The general small business pool is only available for those using the simplified depreciation rules.
A business can allocate any qualifying plant and equipment asset into the pool. To be eligible, the asset’s value or cost must be above the current instant asset write-off threshold. Once in the pool, the asset depreciates at a rate of 15 per cent in the first year, and 30 per cent each following year.
Read more about the general small business pool.
Small business and the Backing Business Investment incentive
The Backing Business Investment (BBI) incentive is in place until June 2021. This works in a very specific way for businesses that use the simplified depreciation rules.
Assets that fall under the BBI incentive depreciate at an accelerated rate, with an instant deduction of 57.5 per cent of the asset’s value in the first year alone. In following years, the asset is depreciated in the general small business pool.
What happens when a pooled asset is sold or destroyed?
An asset can be in the pool for several years. So, assets being disposed of either through sale or from being destroyed isn’t unheard of.
When an asset is no longer in a pool, the total pool balance is reduced by the amount of the sale, or the insurance proceeds if the asset was destroyed.
If the asset had previously been written off, for example a destroyed vehicle that was sold to a scrapyard, the proceeds from the sale must still be added to the businessowners assessable income.
What happens when a business becomes ineligible?
When a small business is successful it will grow over time and its aggregated turnover will increase.
Once a business’s aggregated turnover ticks over the $10 million mark, it isn’t classified as a small business. As a result, it is no longer eligible for the simplified depreciation rules.
When this happens, the business must start using the general depreciation rules. If the business still has assets in the small business pool, the assets can continue to be depreciated in the pool until they are completely written off.
A tax depreciation schedule is essential for any business owner
All businesses need to have a tax depreciation schedule prepared by a specialist to claim depreciation.
A schedule lasts for a lifetime and includes all incentives on offer to maximise claims while ensuring that compliance is maintained. To learn more, Request a Quote or contact BMT Tax Depreciation on 1300 728 726.