What Are Capital Allowances? Understanding the Basics

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As a business owner, do you know how to make your assets work for you?

While running a business you will inevitably have expenses by buying products and assets to keep your business operational. As an owner, you may be able to claim those expenses on your taxes. Capital allowances let you claim credits that will reduce your overall tax bill – and saving on taxes is always a positive for your business.

The following information will break down what capital allowances are and the benefits of claiming.

What Are Capital Allowances?

Think of capital allowances like a tax-deductible expense. It’s an expenditure that can be claimed against the profit of the business. 

Capital allowances are an amount of money spent on assets that can be subtracted from what is officially owed in taxes. 

It is common for capital allowances to go unclaimed which results in the business owner leaving behind valuable tax savings, so it’s important to know what you can claim.

Types of Capital Allowance Claims

Capital allowances are available on the fixed assets of your company. In other words, the things that keep you in business. Some examples are: 

  • Buying new or second-hand properties
  • The remodeling or repair of offices, rental properties, retail properties, restaurants, hotels, hospitals, etc.
  • Research and development
  • Equipment
  • Vehicles
  • Computer software
  • Patents

There are different tax laws every year, so be sure to familiarize yourself with what you can legally claim for that particular year. Not all business assets can be claimed, and some can only be claimed for a certain year.

There are a few different types of capital allowances: the first-year allowance, the annual investment allowance, and the writing down allowance.

First-Year Allowance

The first-year option is when a business can deduct up to 100% of certain assets that qualify for capital allowance.

Some items that qualify for a first-year allowance are energy-saving equipment, water-saving equipment, and zero-emission vehicles.

Annual Investment Allowance

The annual investment allowance is when business owners can deduct the full value of some assets as long as the total is under a specific dollar amount. Many assets fall under this category with the exception of gifts. 

Writing Down Allowance

The writing down allowance is if you fail to claim the first two types of allowances, the government will still allow you to claim a percentage of the assets in the following year. 

This type of allowance is spread out over a number of years. The interesting thing about the writing down allowance is that can be used for gifts or items that were purchased before the start of the company.

To find out more about the distinct qualifications for capital allowances, it helps to consult an expert so you don’t under-claim or over-claim, which could leave the door open to an audit. 

Benefits of Claiming

The bottom line of claiming capital allowances is that it will save your business money. It’s a bonus for companies that are contributing to economic growth and a good reason to invest more in your business.

Don’t take unnecessary risks – take a look at the rest of our site for more helpful business tips!