Accounting relief for Y2K

The newspaper and magazines are full of stories about small businesses that are in trouble because they can't afford upgrades to fix Y2K problems, and yet banks won't lend them money because of their Y2K issues! Since many companies are incurring extra expenses specifically because of the Y2K problem, it seems only fair to make some accounting adjustments to help. Fortunately, our Federal Government has done a nice thing and offers tax relief for small businesses. (Some details are available on the Web site http://www.fin.gc.ca/newse98/98-057e.html but you really should talk to an accountant for specifics).

What the Finance Minister has offered is a way to accelerate the depreciation of any new hardware and software purchased specifically to update systems that were not Y2K compliant, or may have cause problems. The way this is done is to offer an accelerated Capital Cost Allowance (CCA) of up to $50,000 for any systems and software purchased between January 1, 1998 and June 30, 1999. The CCA (depreciation, in layman's terms) is 100% right away, meaning you get to depreciate the full cost of your upgrades in the last or current year, depending on when you bought the products. In real terms, what this means is that if you buy five computers to replace older systems, you get to depreciate them completely instead of at a much lower rate, year after year. This lowers your before-tax income, resulting in less tax paid. It doesn't pay for the upgrades, of course, but it does help considerable in easing the financial burdens.

A Technical News bulletin, number 12, is available from the Finance Ministry to explain what is eligible for this tax break. The guideline reads "expenditures made only to ensure functionality in the Year 2000 are fully deductible in the year incurred". The new software or hardware must be replacing something bought prior to 1998 and the new device must be Y2K-compliant. Replacing last year's 350MHz Pentium II with this year's 500MHz Pentium III is likely not going to amuse the auditors! Use common sense. Buying a 35-inch flat screen monitor to replace your 14-inch monitor just won't cut it, either. However, replacing your old pre-Pentium server and desktops should qualify. Upgrading software to known Y2K-compliant versions is fine, too. Since most software wasn't Y2K compliant until last year anyway, that's pretty well a carte blanche for software purchased prior to 1998. The tax relief will also apply to custom software that needs to be modified, as long as the updates fix Y2K problems. For a better idea of what you can claim, talk to your accountant. 

Only companies with less than $10 million taxable capital are eligible for this tax relief. You don't even have to be incorporated: unincorporated companies qualify too. Special rules apply to corporate groups and partnerships. 

How do you keep track of these expenses? My wizard of an accountant suggests creating new general journal accounts specifically for any software or hardware purchased for Y2K upgrades. That way, the depreciation (sorry, CCA) issues are clear for those new purchases and the non-compliant ones. Naturally, I haven't been doing this, but heck that's why we use accountants! You also should be prepared to justify the upgrades to an auditor, and a letter explaining the upgrades should accompany your return. It needs only list the upgraded hardware and software, indicating they are all Y2K-compliant and that they replace non-compliant products. But be ready to verify everything you say, just in case!

Finally, to wrap up this Y2K series, a quick update on some more e-mail requests. If I had a nickel for every e-mail asking if product X version Y is compliant with the millennium roll-over, well, I would have a stack of nickels. There are several web sits that track many software releases from multiple vendors (see a previous column for the site's URLs) but the first line of checking should always be the manufacturer. Software vendors have jumped onto the Y2K issue with a vengeance, obviously inspired by the upgrade dollars this will generate. Companies like Microsoft have spent a lot of time creating fast look-ups for Y2K compliance for all their products. Check out http://www.microsoft.com/year2000/ for a complete Knowledge Base of all their products. Microsoft has provided a set of articles that explain each product's vulnerabilities and compatibilities, running back many releases. The informations in these articles also point to software patches that fix problems, even with recent releases like Windows 98.

To wrap up, this series has received a lot of comments. The key to tackling the whole Y2K issue is, as I said in the very first column in this series, to take it seriously but not to over react. The world is safe: life will not end in a few months. If you prepare now for your own and your customer's rollovers, all will be well. A steady, documented, systematic approach to verifying your software and hardware systems will pay off handsomely. Make sure all your customers are aware of the potential problems in their products purchased through you, and keep them abreast of any upgrades and patches involved. Sure you don't get paid for this effort, but the customers will appreciate it and as mentioned last month, you may be helping yourself out of some liability issues. By the way, this column will cease to exist on Dec 31: the content isn't certified as Y2K compliant.