Dear Weekender,
Thankfully and contrary to the predictions, it seems that we are saved from a natural disaster this season. Although there are no specific tax incentives for disaster relief, some existing tax incentives can be handy when replacing damaged business assets or the maintenance costs for homeowners.
For businesses, the replacement reserve is one of the tax incentives that should be taken into account when dealing with, amongst others, the aftermath of a hurricane or other natural disasters. When damaged operating assets are replaced or repaired, a taxable book profit may arise. To prevent that, profit tax or income tax (for sole proprietors) is due immediately upon replacement of the operating assets; it should be considered to create a replacement reserve.
The benefit of the replacement reserve can be illustrated with the following simplified example:
Let’s assume that a business uses operations equipment with a book value of USD 100,000. As a consequence of the damage suffered during the passage of a hurricane, this equipment may become valueless, needing to be replaced. Provided that the insurance company pays out USD 170,000 for the replacement of the damaged equipment, this compensation for the assets lost would generally be subject to profit tax. One way to shield such insurance compensation for damages on business assets from immediate taxation is to apply the replacement reserve. The compensation for damages of USD 170,000 remains untaxed for up to four years and can be fully applied upon purchase of new business assets replacing the lost assets.
If the replacement reserve is not applied, the outcome for tax purposes would be completely out of touch with reality and unreasonable for the taxpayer, since the business just received a hard blow rather than a profitable year. If the replacement reserve is applied correctly, the aforementioned adverse profit tax consequences could be mitigated and deferred to future years.
Other tax incentives that relate to the replacement of operating assets for businesses in Sint Maarten are the investment allowance and the accelerated depreciation on (newly) acquired business assets. In this respect, it should be noted that if the threshold of NAf. 5,000 (USD 2,809) is exceeded, the investment allowance amounts to 8% of the new operating business assets and it can be applied for two consecutive years. For “new buildings” as well as the “improvement of buildings”, investment allowance is 12%. If the tax incentives of investment allowance and the accelerated depreciation are applied correctly, the company could report taxable losses, which can be used to offset taxable profits for the next 10 years.
For homeowners, it should be noted that maintenance expenses of the personal dwelling are deductible for income tax purposes for the maximum amount of NAf. 3,000 (USD 1,685). But be warned that this tax incentive is not meant for the routine maintenance (cleaning) fees for swimming pools or a gardener.
Trusting to have provided you with some insightful knowledge again, let’s keep safe for now until next month. #knowyourtaxes
Sincerely,
Nicole Echobardo | HBN Law & Tax
