Trade tools are costly and there are tax savings to be made if you know a bit about the rules. Here are three tips that could boost your business.
1. Try to keep each purchase under $1,000
There’s a tax rule that allows you to treat any tool that costs less than $1,000 as an expense. What this means for tax is that you get the full tax saving now rather than spreading it over several years.
Let’s say you need a new power drill this year. If the drill costs you $999, you will pay about $92 less tax this year than if the drill had cost you $1,000.
How does this work? The drill that cost $1,000 can be depreciated, which means you do get a tax deduction, but it is only at the rate IRD publishes. In the case of tools, most of them have a rate of 67%. That means that in the first year you can only deduct $670.
| Tool that costs $999 | Tool that costs $1,000 |
Tax deduction in year 1 | $999 | $670 |
This works out to be a difference in profit of $329, which at a tax rate of 28% comes to $92.
Profit difference | $329 |
Tax difference | $92.12 |
Eventually the $1,000 tool will be depreciated fully, but for now that $92.12 is better off in your pocket than the IRD’s.
2. When tools cost more than $1,000, depreciate them at the highest rate
When you do buy a tool for more than $1,000 there are usually a couple of options when it comes to depreciation. There’s the Straight-Line rate and the Diminishing Value rate. IRD publishes all the rates, so it’s easy to do a quick check. The rate you choose can make a big difference to your tax.
Let’s say you buy a nice new ringlock scaffold setup for $3,000. One depreciation option will give you a tax deduction of $750 in your first year, while the other will give you $525.
| Diminishing Value | Straight Line |
Depreciation rate | 25% | 17.5% |
Tax deduction in year 1 | $750 | $525 |
This works out to be a difference in profit of $225, which at a tax rate of 28% comes to $63.
Profit difference
Profit difference | $225 |
Tax difference (28%) | $63.00 |
Yep, that $63 is better off in your pocket than the IRD’s.
3. Sweat your assets
Even though you now know how to max your tax deductions when you buy a new asset, it still might not be the best thing to do.
Some tradies reckon that because buying things reduces their tax bill, they should just go for it, especially if it’s been a good year and they’re on track to make a profit.
I reckon that saving tax should always be secondary to making profits. Unless you really need to, there is no point spending $100 just so you can save $28 in tax.
Like you sweating it out on the work site, getting every bit of sweat out of your tools and only replacing them when they’re totally stuffed is the way to get your trade business profits rocking.
What next?
Before you buy that next tool, make sure you’re maxing out your tax savings, so go ahead and flick me an email or book in a free 30 minute phone call and run me through it.
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