Determining when to capitalize or expense purchases can sometimes be challenging especially when doing bookkeeping for small restaurants.
In January 2014, the IRS issued final repair regulations as guidance on when to expense and when to capitalize. As a result, I've pulled together common questions asked in the forum surrounding aggregate purchases of low cost capital assets and CRA's take on the subject.
Many restaurants deal in cash. CRA does not allow cash basis accounting unless you are a farmer or fisherman. (See U.S. position here.)
The cash basis of accounting is generally not in conformance with GAAP. It does not present an accurate picture of the financial status of the business.You should know that the Income Tax Act (ITA) is based on GAAP as it's starting point.
I want to start by saying I have limited experience with bookkeeping
for a small restaurant. But strictly from a bookkeeping perspective,
I'll give you my two cents.
1 and 2. CRA has a set of questions to help you decide when you need to capitalize an expense.
Take the time to read about capital cost allowance used for income tax preparation in Canada. (In the U.S. the IRS equivalent is depreciation for tax purposes.) It helps you determine how CRA classifies capital costs into different classes. For example, class 12 includes china, cutlery, linen, uniforms.
you capitalize the coffee maker and any other small kitchen appliances
which cost $500 or less if they were purchased at the same time or
within days of each other. The CCA class would be class 12. Once a tool or appliance is over $500, it is classed in Class 8.
The reasoning behind this was explained very well in the U.S. forum (see side bar) and holds true in Canada as well.
"For financial statement purposes
(not tax purposes) expensing or deducting an
aggregate amount of assets (having a life
longer than a year) which is material or
significant to your annual revenues will distort
your true operating performance and may give
you a false picture of your real net income and
how well you are or are not doing. For tax
purposes, as long as you follow the
guidelines, the government could care less."
3. Generally, renovations to rental property are captured under an asset account called Leasehold Improvements. It is classified as CCA class 13 for income tax purposes and is for such things as improvements to a leased space. It does not include substantial alterations to leased premises. These should be captured and accounted for under buildings class 1, 3 or 6.
4. There are special rules for claiming business use of your personal vehicle. Make sure to keep an auto log to prove your business use.
You can record all your vehicle expenses in your books. In your chart of accounts, setup an parent account called "Vehicle Expenses". Then setup sub accounts for the expenses categories CRA requires on Schedule T2125 at 100% of the receipt.
Also setup one more sub account to capture "Personal Use of Auto". At year-end, reduce the auto expenses by crediting "Personal Use of Auto" for 70% of the total (in your example) and debiting "Owner's Draw". Your net vehicle expenses would then be showing 30% if you've done the entry correctly and ... bonus ... you have a complete audit trail in the event of an audit. Also make an input tax credit adjustment for the personal amount by debiting GST/HST Payable and crediting "Owner's Draw".
5. Where you classify these is unique to your situation and a good thing to discuss with your accountant. Dollar value has to be considered here. The design costs for both could be classified under marketing expenses or as an eligible capital expenditure. The store sign / light box would be a fixed asset under CCA class 8.
Whatever decisions you make, make sure you keep a list of your decisions to give your accountant. If s/he doesn't agree with your decision, the entries will be journalled to a more appropriate account at year-end.
Sometimes bookkeeping / accounting work requires the use of judgement based on the unique circumstances of the transaction and / or the business ...
In my opinion, if the purchases were capitalized, they would fall under class 12 which has a CCA rate of 100%. Most Class 12 items are NOT subject to the half year rule. For tax purposes these additions are depreciated at 100% which is the equivalent of being expensed.
It seems the CRA recognize that these types of items have a short life due to wear and tear as you suggest and Class 12 was created to address that.
Before I made my final decision, I would attempt to find out what the industry standard is. Deciding how to classify aggregate purchases each under $500 was discussed earlier in this chat.
Aggregate purchases of capital assets valued at amounts under $500 are discussed at the beginning of this chat.
These are the other responses made in the forum to this question.
Gunner made an excellent point by stating that the items of low value like the ones you listed are expensed for the sake of materiality which is one of the guiding principles in IFRS.
Another person explained usually anything that is over a certain amount of money and serves the purpose of generating revenue is considered an asset. When I see something over $1000 I classify it as an asset. It really depends on the business. Some businesses go by the $500 rule. Ask yourself how long will this asset/expense last the company.
For further assistance with your decision, see the questions CRA wants you to ask.