Should you buy a new car before year end to reduce your 2020 taxes? It’s a good question especially because lucrative new tax rules were put into place for the write-off of most capital assets* on November 21, 2018. Taxpayers can in fact, triple up on the usual first-year tax deductions when they acquire assets in the period between November 20, 2018, and December 31, 2023, and put them into use before 2028.
Prior to this, taxpayers were restricted to “half-year rules” in the year they acquired an asset. This allowed for only 50% of the normal CCA claim in that year. For example, if the normal CCA rate was 30%, only 15% was allowed in the first year. However, under the new accelerated rules, the allowable first-year claim is 150% of the normal CCA claim, for assets that would otherwise be subject to the “half-year rules.” These enhanced write-offs can only be used in the first tax year the property is available for use in the business.
For purchases in years 2024 to 2027, the half-year rule will be again be suspended, and a claim of the normal CCA rate will be allowed; in other words, the full year of CCA will be allowed in the first year. In the case of eligible property that would not be subject to the half-year rule, the enhanced CCA in the phase-out period will be 125% of the normal first-year allowance.
For purchases after 2027, the pre-November 2018 rules will apply; that is, the normal half-year rules will again apply. Fortunately, computer tax software computes it all automatically.
Yet, from a planning perspective, there are a couple of catches to be aware of. First, neither the taxpayer or a “non-arm’s length person” can have previously owned or acquired the property.
Second, the property must not have been transferred to the taxpayer on a tax-deferred rollover basis. In these cases, the property will not qualify for the fast write-offs.
For these reasons, it’s important to speak to a DFA-Tax Services Specialist™ before acquiring a property or transferring it from personal to business use.
Excerpted from Make Sure It’s Deductible, 2020 edition, by Evelyn Jacks, now available.
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*This is someone related to the taxpayer by blood relationship, marriage, including a common-law relationship or adoption. In some cases, corporations and taxpayers are not considered to deal with one another at arm’s length.