Did your business spend money on new or replacement equipment this year?
Businesses in the manufacturing industry can easily spend millions of dollars on expensive machinery. New businesses struggle the most as it can them years to cover the costs of their equipment. Not to mention the costs of maintaining and replacing the equipment as it ages.
Fortunately, there is a way for businesses to recover from equipment purchases faster. An annual investment allowance (AIA) allows businesses to deduct up to 100% of their business-related equipment costs. This tax deduction helps businesses keep their doors open, keep people employed, and help the economy.
If your business made any equipment purchases within the year, it may qualify for an annual investment allowance. But before you try to deduct your equipment purchases, there are limits. There are limits on what qualifies and how much you can deduct.
Do you want to save your business tax money this year? Here’s what you need to know about an annual investment allowance.
About an Annual Investment Allowance (AIA)
An AIA is a type of tax relief for young businesses that need to buy business-related equipment. This tax deduction allows businesses to subtract the entire cost of their equipment purchases from their taxable profits of that year.
There are limits and restrictions with the AIA. While the AIA allows businesses to deduct up to 100% of their equipment costs, there is an annual limit. If your costs go above that limit, then the business can only deduct as much as the annual investment allowance limit permits.
The annual investment allowance rates adjust every couple of years.
The original amount covered up to only £50,000 in equipment purchases. By 2010, that limit rose to £100,000. Between 2012 and 2015, the limit rose and dropped between £25,000 and £500,000.
It wasn’t until July of 2015 that the permanent limit was set to £200,000. That meant the AIA limit allowed businesses to deduct up to £200,000. In January of 2019, that limit rose to £1 million for tax years of 2019 and 2020.
The AIA gears to business equipment such as tools and machinery. However, the majority of the assets your business purchases within the tax year are eligible for an AIA.
You can’t claim a deduction on equipment purchases you made years ago. Business equipment purchased within the tax year can qualify.
The United States has a similar tax relief known as a Capital Allowance. Unlike an AIA, the capital allowance will cover up to 67.7% of investments in equipment, buildings, and other business needs.
The Purpose of an AIA
The annual investment allowance began in 2008 in the United Kingdom. Its purpose is to encourage businesses to invest and spend money on qualifying equipment.
The goal of the AIA is to keep businesses in the manufacturing industry operational. Operational businesses keep people employed and help the economy grow.
This is particularly helpful for newer businesses that may not be able to overcome their equipment costs. Whether your business is new or old, AIA can alleviate most of your expensive equipment purchases.
The main purpose of an annual investment allowance is to help new businesses financially in their early years. An AIA is not a continuous tax break for stable businesses.
Who’s Eligible for an AIA
The annual investment allowance is available for companies, sole proprietors, and business partnerships. Eligible partners must be individuals.
Sole proprietors and partners who are members with more than one business can claim an AIA for each business they are a part of. However, if one person conducts activities similar to another limited business, they can only claim 1 AIA. From there, the owner or partner can split the AIA funds between the businesses.
Here’s An Example
Suzy started a fine art framing store. She needs saws and sanders to make her frames and a van to pick up raw materials. She also needs a computer and a small administration office to track payroll, sales, and orders.
Since she purchased a saw, a van, and new software within the tax year she can claim an annual investment allowance. This would be a Capital Allowance claim under the AIA.
She claimed £5,000 for the saw, $25,000 for the van, and $2,000 for the new computer. Her total claim comes to £32,000 for the year.
If she needs to purchase another piece of equipment next year, she can claim it as an AIA on next year’s taxes.
What Does an Annual Investment Allowance Cover?
There are limits on what an annual investment allowance will cover. Mentioned above, the AIA covers tools, machinery, and a few other equipment purchases. Here are a few more items covered by the AIA.
You can claim a deduction on work vehicles purchases such as trucks and vans. They must play an integral part in your business operations, such as a moving truck or van for a moving company.
An AIA can cover the costs of some fixtures, such as an air conditioner, a small kitchen, and bathrooms.
While an AIA will not cover the cost of most office supplies, it will let you deduct office equipment purchases. This includes computer hardware, some office furniture, and some computer software.
Agriculture machinery and business-related machines (for manufacturing) are claimable through an AIA.
All purchases must play an important role in how your business operates. If you’re looking to add a couch in an office lobby for decoration, you can’t claim it under the annual investment allowance.
There are several other work-related items you can’t use an annual investment allowance to cover.
Entire buildings and land are not equipment and not claimable for an AIA. You also cannot claim cars unless your business is a driving school. Any item used for entertainment, such as games, are not eligible unless you own an arcade or entertainment business.
Claim Your Annual Investment Allowance This Year
Are you a new business that needed to buy equipment to get started this year? Then you most certainly qualify for an annual investment allowance. Deducting those expensive equipment costs from your taxes will help you keep your business running.
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