When is the Right Time to Buy Equipment?
Fall is here and winter is coming… I cringe just saying it. But with winter on its way, this gives most producers the chance to sit down and start planning for next year. Some of that planning might include investment decisions in equipment, machinery, bins or other long-term assets.
So when is the right time to purchase assets? This is a question that is often brought up. While there are some obvious practical issues to consider, such as pricing, financing options, intended use, planned ownership period, and availability (just to name a few) there is also a tax issue to consider. While we don’t advocate for making purchasing decisions solely based on tax implications (the practical issues should hold more weight) the timing effects on tax implications, known as depreciation, are important to consider.
Depreciation is a tax expense used to account for the usage of an asset. In the year of acquisition* you are only entitled to half of the regular depreciation rate, regardless of how early or how late in the year the purchase is made. This means that the depreciation is the same in the first year whether you own the asset for 1 day or 365 days. So you could technically use it for an entire production cycle and incur a full year of usage, but only get half of the regular depreciation.
Therefore if the practical issues mentioned earlier allow for it, it is beneficial to purchase the asset later in your fiscal year rather than at the start of the following. This will allow the half-year depreciation to be dealt with sooner rather than later and allow the regular rate of depreciation to apply the following fiscal year once the asset has been used for a full production cycle.
Here are some of the typical asset classes and their regular rates of depreciation:
|Pull-type and general equipment||20%|
|Self-propelled, automotive and trailers||30%|
|Bins, shops, and buildings||10%|
|Computer and data processing equipment||50%|
If have any questions about this topic or anything else related to your farm operation don’t forget that Talbot & Associates has a team of dedicated and passionate individuals ready to help you out. Just contact us and ask for our Ag Team.
Stay tuned for a future newsletter topic that addresses the Buy vs Lease question.
*CRA’s definition of acquisition might be different than what you think it is. Acquisition for tax purposes doesn’t necessarily mean you’ve paid for the asset. It means that you’ve entered into a contract where it stipulates that the ownership of the asset has transferred to you. In other words, if the asset is available for your use, who have deemed to acquire it. Even if the asset is still sitting on the dealer’s lot it is deemed to be acquired for tax purposes as long as you can go pick it up at any time of your choosing. Timing of payments, or financing terms, are related yet separate issues. Given this definition, there are planning opportunities that should not be ignored.