Question about capital allowances on a tax return

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CharlieMac

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I did a few searches about this on AAM threads but did not see an answer to this one.

Over the years I have had to replace fridges, washing machines, furniture, microwaves etc in a rental property.

Sometimes the invoice shows some or all of these: the cost, delivery charge, installation charge, WEEE/recycling charge, VAT.

When writing down the purchase of a capital good over 8 years what cost figure do you start with? The entire cost on the invoice including any or all of the above charges? Or is it the ex-VAT cost only and none of the other stuff? Something else?

Would a microwave oven be considered a capital good or treated instead as an expense?
 
Unless you are registered for VAT, it is the total outlay

I would consider a microwave oven as an expense, unless you paid 1,000s for it
 
I'm sure there are landlords claiming wear and tear on plenty of purchases like tables and sofas that were several €100s and not €1000s.

But a microwave could be treated as a capital good right? Is there a philosophy or convention or rule to follow with low value capital goods?

The advantage of capital allowances is you can write off the full amount of the purchase against tax... albeit you have to wait 8 years to get all your money back. If I treat the microwave as an expense then I can only get 40% of the purchase price back.

With low value capital goods is the thinking: it's better to get 40% up front than have to wait years to get 100%, or even 4 years to get 40+% back?

There is a rule I think whereby if the capital good breaks and has to be replaced within the 8 years you can't claim anymore wear and tear on it. So is that another reason behind treating low value capital goods as expenses? Or is there something else I'm not seeing?
 
I meant to say 52%. Assuming I am already paying income tax at 40% then any rental income is taxed at 40% plus PRSI and USC which comes to around 52% these days?

Expenses are deducted from gross rental income, before calculation of tax, so if I claim €1000 as an expense against Gross Rent (Scenario B), instead of paying it out of rental profits (Scenario A), the net effect is I pay 52% less tax on the amount of the expense... €520 in the example below - Scenario B.

1763208860347.webp

Isn't that how it works with expenses?

With capital goods you can write off the full purchase price in wear and tear deductions over 8-years, not only a certain percentage of the full purchase price, as a once off. So instead I could pay €1000 less tax via wear and tear deductions, albeit I had to wait 8-years.

So, my point is, why would you ever treat a capital good as an expense? What are the circumstances where it makes sense to treat capital goods as expenses? I suppose one example might be a microwave that may break down before 8 years is up? But is there some other reason? I don't think that because the capital good didn't cost €1000s that is a reason not to claim wear and tear on it.
 
It is exactly the same except that in one case you add the cost of € 1,000 to year 1 expenses, reducing your profit by € 1,000 and in the other you add 1/8 of the cost every year

Your tax % has absolutely nothing to do with your calculations
 
I used my tax % to demonstrate that treating a capital good as an expense only allows me to recover 52% of the purchase price vs 100% if I treated it as a capital good with 8-yearly wear and tear deductions.

Or am I mistaken about something?
 
CharlieMac said:
Isn't that how it works with expenses?
Click to expand...
No, the calculation is as below - if you treat the cost as an expense it reduces your profit and tax in year 1 but does not affect the following 7 years
If your use capital allowances, your cost is spread over 8 years but the result over the 8 years will be the same


Gross rent
€ 10,000​
less expenses
€ 1,000​
Profit before tax
€ 9,000​
Tax @ 52%
€ 4,680​
Net profit after tax
€ 4,320​
 
CharlieMac said:
Or am I mistaken about something?
Click to expand...
Unfortunately you are gravely mistaken in your understanding, yes. Capital allowances are simply the tax equivalent of depreciation for accounting purposes, where the cost of an asset is expensed over multiple periods to reflect its expected consumption / useful life.

Both direct expenses and capital allowances are deducted before you reach the taxable profit figure, so treating an item as a capital item subject to wear & tear allowances spreads the tax deduction over 8 years rather than all in 1 year if it were an expense.
 
Thanks very much both for clarifying that. I always struggle with understanding how tax relief works. I thought I had figured it out recently but obviously not!

I think the language isn't intuitive to lay people. For instance, regarding buy-to-let properties:

"Mortgage Interest is 100% tax deductible"

OR

"100% of mortgage interest is fully tax deductible"

For a long time I thought that meant: "You get a full refund (in your tax return) equal to the full amount of mortgage interest you pay".

But despite figuring out a while ago that was not the case at all I still made the same mistake in my understanding of how Capital Allowances works.

I had an idea that Wear and Tear deductions meant you got a refund every year for 8-years and the amount received each year was equal to 1/8th the cost of the capital good?! In my head "Writing off the full cost of the capital good over 8-years" meant "After 8-years the net cost to you of that capital good is ZERO".

torblednam said:
Both direct expenses and capital allowances are deducted before you reach the taxable profit figure
Click to expand...

OK so the tax relief you can avail of from an Expense and a Capital Good is the same...
The amount of the relief is the rate of tax you pay multiplied by the amount you are claiming in the tax deduction.
With expenses you can get all of that relief in Year 1 whereas with Capital Goods you have to spread it out over 8 years.

So in fact Capital Allowances are not some kind of incentive for businesses to invest in themselves it is more so a way for Revenue to prevent businesses from availing of large amounts of tax relief all in one go... and not paying any tax at all.

But on the flip side it could also help businesses medium term cash flow to have a steady stream of 1/8th tax relief on the capital good purchase deducted from their gross profits each year for 8 years.

Ok, so if it is allowed, it would make more sense for me to treat a new microwave as an expense!
 
There is a big distinction between capital expenditure and non-capital expenditure when it comes to calculating profits and taxes

Strictly speaking any expenditure on goods that will last more than one year is capital expenditure.

When calculating accounting profits, you usually charge the cost of such goods over the lifetime of the goods - this is the annual depreciation charge

When calculating taxable profits, you ignore depreciation and instead you use a capital allowance of 1/8th of the cost

In practise, small capital goods are written off as expenditure
 
CharlieMac said:
I meant to say 52%. Assuming I am already paying income tax at 40% then any rental income is taxed at 40% plus PRSI and USC which comes to around 52% these days?
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Just to flag, there is no deduction for Case V capital allowances against USC. This is yet another sneaky stealth tax put on landlords.

If you put the one-eighth of cost deduction into your tax return as an "other" type expense, then you effectively get a 52.2% deduction. However, if you put it through as a capital allowance, even though it's basically the cost of a bed or a fridge, you might only get 44.2% tax relief. (Assuming you're on the highest rate for all the income).

Technically it shouldn't be included as an "other" expense, but I would be surprised if most individual small "landlords" (what an archaic term, you'd swear a 2-bed apartment was a medieval fiefdom) use the capital allowances box for this type of expense.
 
jpd said:
Unless you are registered for VAT, it is the total outlay
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It is not possible to reclaim VAT on costs of residential lettings. It used to be possible in the distant past but not anymore. A landlord can't "opt to tax" a residential letting.
 
CharlieMac said:
For a long time I thought that meant: "You get a full refund (in your tax return) equal to the full amount of mortgage interest you pay".

But despite figuring out a while ago that was not the case at all I still made the same mistake in my understanding of how Capital Allowances works.

I had an idea that Wear and Tear deductions meant you got a refund every year for 8-years and the amount received each year was equal to 1/8th the cost of the capital good?! In my head "Writing off the full cost of the capital good over 8-years" meant "After 8-years the net cost to you of that capital good is ZERO".
Click to expand...



The tax relief is typically equal to (your marginal tax rate) * (the value of the item / deduction / expenses)

Tax relief on new washing machine = (40%)*(price of washing machine)

The net cost of the capital good for the landlord will be (1 - marginal tax rate)*(value of the good/expenses)
 
Would OP connsider contracting an accountant ? Its good idea to get advice but its not a guranteed and sustainable solution ?
 
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