As you prepare to file your tax return at the end of the year, you may be entitled to deduct operational costs that you paid to run your business. To ensure that you take the maximum amount of deductions that your business is eligible for, it is important to keep your financial books and records up to date. This will help you to identify deductible expenses and evaluate your expected tax liability. Doing this before the end of the year can help with tax planning.
Business owners have a variety of deductions that they may take. Below we have included some of the most common ones.
Advertising and Promotion – Whether you promote your business online, in print, or on the radio, you may be able to deduct these amounts on your tax return.
• The amounts that you pay to host your website, pay-per-click ads, and other online ads can typically be deducted in full.
• Print advertisements that are run in a Canadian magazine can be deducted in full. Newspaper advertisements may only be deducted in full if the newspaper is Canadian and the total advertisements within the paper make up 20% or less of the total content with the remaining 80% being editorial in nature. If the advertisements exceed 20%, then your deduction will be limited to 50%.
• The cost of running television and radio advertisements can be deducted in full as long as the show is Canadian.
• Promotional expenses can typically be deducted in full. These include expenses such as the printing of brochures, merchandise that is branded with your company name or logo that is given out for free, or the cost of running a seminar.
Bad Debts – If you billed a client but were never paid, this amount can be deducted on your tax return if you already recorded this as income in the current or prior year. If you have not already included this as income, no allowance for a bad debt can be taken.
Bank and Interest Charges – The fees that you pay to the bank on your business accounts are deductible for tax purposes. If you were you charged by the bank, this may also be deducted.
Insurance – Payments made toward insurance policies that are used to secure the assets and operations of a business are generally deductible. These include premiums paid for business interruption, liability, and property policies. Premiums paid toward life insurance policies are not deductible unless the policy was used to secure a business loan.
Interest Expense – If you have taken out a loan with the intent to benefit your business, the interest that you paid can be deducted. Keep in mind that if the loan was used for personal reasons, any interest paid cannot be deducted on your return.
Legal and Accounting Fees – Fees paid to attorneys or accountants can be deducted if the services rendered were in connection with your business.
Meals and Entertainment – Amounts that you pay for meals and entertainment expense can be deducted up to 50%. If the meal is considered excessive, however, the amount that can be deducted will be limited to 50% of what a reasonable expense would be.
Exceptions to this rule include:
• If you own a restaurant or hotel and regularly provide meals to customers in the course of your business, the 50% limit does not apply.
• If you include the cost of the meal on an invoice to your customer, the meal expense deduction will not be limited to 50%.
• Meals served at fund-raising events are not limited if they were incurred to benefit a charity.
• Meal expenses that are incurred for an office party may be fully deductible if you invite all employees from a specific location to attend. There is a limit of six events of this nature each year.
Entertainment expenses may be deducted up to 50% of the cost. This includes costs incurred for tickets to sporting or other events, renting out a room, and gratuities.
Different rules may apply to meals for individuals who are self-employed, fishers and their crew, and truck drivers who travel for a continuous 24 hour period. You can learn more about these deductions here.
Rent Expense – Office lease payments are deductible on your tax return.
Repairs and Maintenance Expense – Amounts that you pay to maintain or repair equipment or property can be deducted. If you are making repairs to a building, they must be incidental in nature. If the amounts paid will extend the useful life of the asset, it would not be considered a repair and maintenance expense. Rather, this would be included in the calculation of depreciation expense under the tangible property.
Salaries and Wages – Amounts paid to employees for wages are fully deductible. Other related employee expenses, such as payroll taxes and insurance, are deductible as well.
Shareholder Loan Repayments – Any loan that is made by a shareholder to a company is not considered to be taxable income. When the company repays the loan, it is not considered income to the shareholder, nor can the company take a deduction. However, if you charge the company interest on a shareholder loan, interest payments the company makes are deductible on a corporate tax return. Keep in mind, however, that interest payments received by you personally will be considered taxable income to you.
Tangible and Intangible Assets – Assets that have a useful life beyond one year are considered tangible or intangible assets.
Tangible assets include such things as buildings, equipment, and vehicles. These assets are written off through a depreciation expense deduction using the Capital Cost Allowance (CCA). Under the CCA, assets fall under certain classes, which determine the percentage of depreciation that can be deducted each year.
Intangible assets include patents, goodwill, and trademarks. Assets that were acquired on or after January 1, 2017, are deducted at a rate of 5% each year until fully amortized.
Taxes – A business can pay several types of taxes. Income tax, property tax, and payroll tax can be deducted.
Travel Expense – Expenses that you pay for traveling on a business trip are deductible. This includes airfare, taxis, rental cars, and trains. Overnight stays at a hotel are fully deductible. In addition, 50% of amounts paid for meals are deductible. Expenses that were incurred for personal travel are not deductible.
Vehicle Expense – If you use your personal vehicle for business reasons, you may deduct a percentage of expenses incurred.
Your deduction is based upon the ratio of:
Total kilometers driven for business purposes / Total kilometers driven
Expenses such as gas, oil, repairs, and registration fees may be deducted based upon this percentage. Certain expenses, however, such as parking fees are fully deductible.
To learn more about the deductibility of your expenses, visit the Canadian Revenue Agency here.
You can start preparing for your year-end tax return now. Strive to keep your bookkeeping records current, as it will help you to identify potential tax deductions and plan for the year-end. Be sure to keep invoices, receipts, and detailed logs of kilometers driven for business purposes to support your deductions. If you lack the appropriate documentation, your deduction may be disallowed.
If you have fallen behind in your bookkeeping and need help, contact the professionals at Valley Business Centre. Since 1990, we have helped small and medium-sized businesses with their bookkeeping and payroll need. Serving clients in the BC area and beyond, we offer reliable and timely service. For more information, contact the bookkeeping specialists at Valley Business Centre today.
Companies are always looking to save on their year-end taxes. If you are a small business owner, there are many ways for you to reduce your tax bill. By putting these ideas to work for your company now, they may save you a little money at the end of the year. Below are a few tips to help ease your tax burden.
Home Office Deduction – Many owners conduct all or a portion of their work from home. If this is your situation, you may be able to deduct some of your home’s expenses such as rent, utilities, and insurance. To claim a deduction for your home office expense, you must meet one of two requirements:
• You conduct at least 50% of your work from your home office
• You use the space in your home only for work
If you meet one of the above, you can deduct the portion of your expenses that you can attribute to your home office. This calculation may be based upon the square footage of your home office to the rest of your house.
Business Use of a Personal Vehicle – If you use your personal car to meet with clients, deliver products, or attend meetings – part of your expenses can be deducted. These deductions are limited to the percentage of business use, so keep a mileage log to track business miles. The business percentage of gas, tolls, insurance, and repairs that you’ve paid for can be deducted on your business tax return.
Buy Capital Assets Near the End of the Year – When your company buys a capital asset, such as furniture, equipment, or computers, a portion of what you paid for is deducted over its useful life. This often ranges from three to seven years. This deduction is known as the Capital Cost Allowance (CCA).
A business can deduct up to 50% of the CCA that it would be entitled to in the first year, regardless of when you bought it. Whether you purchase the asset on January 1 or on December 1, you will be entitled to the same amount for your deduction.
A few other tax strategies to consider for capital assets.
• The CCA is not a mandatory deduction. If you have a year where you owe very little or nothing at all in taxes, you can carry forward the amount of CCA deduction that you were entitled to. It may have greater use in the following year if you expect to owe taxes.
• If you need to sell a capital asset and expect to have a gain, consider selling these at the beginning of the following year. You’ll still owe tax, but you’ll hold onto your money for a longer period of time.
Plan Your Losses – Whether you are just starting out or the economy is struggling, your business may experience a loss. These are considered non-capital losses and can happen when your deductible expenses exceed your revenue for the year.
These losses can be handled in three ways:
• Offset personal income in the current tax year
• Carryback the loss for up to three years to recover tax that you paid during that time
• Carryforward the loss for up to seven years
If you just had a slow year, but are expecting business to pick up – it may make more sense to carry the loss forward to offset the future tax that you may owe.
Tax Credits – We often think of tax credits as being something that large corporations get. However, there are tax credits available to small businesses that you may not know to exist:
• Apprenticeship – If you hire a student who is in their first two years of an apprenticeship, you may be eligible for a $2,000 tax credit. This may be a great option for a small trade business.
• Child Care Spaces – If you are not in the childcare business, but create space to provide childcare services for your employees, you may be eligible for a tax credit of up to $10,000 or 25% of expenditures that qualify. The facility does need to be licensed and operated for the benefit of your employees.
Hire A Family Member – If you have an immediate family member that you support who helps with your company, such as a child, make it official and pay them. By putting them on your payroll, they pay a lower tax rate on what they earn. This also lowers your net income and reduces the amount of taxes that you owe.
Suppose you employ your college-aged son or daughter and pay them a $10,000 salary. Your son or daughter would be taxed at a much lower rate. In addition, your marginal rate would be less as well, as you have $10,000 less in taxable income.
A few words of caution, however. When paying a family member, compensation needs to be reasonable for the position and similar to what you would pay someone else. Paying a high salary that is not commensurate with the work that is being done could be challenged by the CRA. Be sure that your family member completes all of the relevant paperwork when they are hired. If you pay them hourly, they should submit a timesheet that documents the days and hours that they work.
Incorporate – If you are a sole proprietor, you might consider incorporating your business. By doing so, you may be able to take advantage of the Small Business Tax Deduction. This will allow your net income to be taxed at a lower rate of 10.5%. To qualify, you must be a Canadian corporation. All other corporations would be taxed at the minimum 15% rate.
If you are a growing business or expect to grow in the future, incorporation can be a great option for you. Not only does it provide more legal protection, but you can also get the benefit of a lower corporate tax rate. However, there are costs of incorporating. If you end up taking most of the profit out of your business through a salary, incorporation may not be cost-effective for you as your company would not have any taxable income.
Keep Track of the Little Things –
Finally, if you regularly treat clients to a cup of coffee, pay for parking during meetings, or buy roles of stamps to send a few letters out, these are all deductible expenses. Perhaps you paid for this on your credit card or with the cash in your pocket. By keeping your receipts for these little things, they can add up to a nice deduction over time.
While running your own company is rewarding, paying out more in taxes than you need to is not. An owner can find ways to keep more money in their pocket. Incorporate these strategies above and you may be able to reduce your tax bill.