Is your business in the process of developing or modifying an acquired technology? This can be machinery, electronic hardware or a software product that needs to be customized. Your end result is a new valuable asset that you own and brings long-term economic utility. In this path, we recognize two costing aspects: (i) isolating development costs up until feasibility or successful prototype stage – you may even be eligible for SR&ED tax credits; and (ii) recalculating your costs for the now “new” asset that will be part of your capitalization process.
Evaluation of your “new” asset has important business impacts, such as:
• Changes to your adjusted cost base and determination of CCA balances or the tax equivalent of depreciation. This balance can be used on a discretionary basis to reduce your tax payable and impacts your cash flow;
• Accurate balance sheet reporting of assets with improved estimate on fair value of your asset;
• Reduce ambiguities with stakeholders who can argue for and against capitalization costs and/or recording operational expense; both impact your tax payable.
Furthermore, there are Federal and Provincial tax benefits. For example, in the case of Quebec’s M&P tax relief program, an accurate recording of your asset will imply:
• Ability to report your true asset cost in an accelerated depreciation class and hence a faster write-off on your asset at the tax level, even if there is a longer life time for the asset;
• Maximize your cash receivable as part of a refundable investment tax credit!
The process of asset recording can be as diverse as installing equipment or valuation of a software tool. With technological advancements, there are elements of increasing complexity and require inter-disciplinary team of engineers and tax accountants. Here are a few examples:
Case i: You require additional cost outlay to bring economic benefit from your M&P equipment. This can involve complex engineering analysis, initial tests and compliance, additional electronic hardware installations, extra-ordinary floor preparation, and even initial travel and training for operational needs. These new costs can materially impact your actual asset cost and hence your taxable benefits. Just consider the additional labour costs alone!
Case ii: Your software development employs agile methodology and has products that are increasingly modular. Did you know, one can identify economic benefit associated to individual software modules by itself! On the other hand, waterfall approach has large capital expenses and there can be complexities in identifying the application phase after the initial prototype phase. You still need to be identify various different development phases for asset capitalization!
Case iii: You modified your buildings to support M&P activities. Consequently, parts of your building can be eligible for reclassification into faster depreciation class, leading to increases in your net present value of your future cash flow.
In summary, with technology advancements, increasingly engineering teams cross function with tax accountants! There are already several eye-opening opportunities where your business can benefit useful tax dollars from an accurate asset reporting. In this process, capital asset review is an unsung case in point!