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.
Small business owners often rely on Company vehicles to run their operations. Whether you use a car to visit clients, a van to make deliveries, or a truck out on a job site, a common question comes up – should I buy or lease?
To answer that question, let’s start with why you might choose to lease or buy.
Leasing a car – Under this arrangement, you enter into a lease agreement and pay a monthly amount. You may be required to put a small amount down toward the lease. The agreement typically covers a period of two to three years. At the end of the lease, the vehicle is turned back in. In some cases, you may have the option to purchase the vehicle at its current fair market value at the end of the lease.
Monthly lease payments are typically less than what they would be if you purchased and financed the car. However, lease agreements usually have a limit for the total miles that can be driven. This mileage limit is typically 10,000 – 12,000 miles per year. If you exceed this limit, you will be charged an extra fee for every mile above the allowed amount.
What You Can Deduct – The Canadian Revenue Agency (CRA) allows you to deduct up to $800 plus HST of your lease payments each month. This is limited to the percentage that the vehicle is used for business purposes. The CRA considers any vehicle that is $30,000 or more as a luxury vehicle, which may slightly reduce the amount of lease payments that you can deduct for business use.
Who Benefits Most – For some, leasing a car makes sense. To make that determination, you should consider;
• What type of car you need – If you are looking for a more expensive car, monthly lease payments are typically less than loan payments. If you are limited in funds each month, leasing a car can allow you to purchase a more expensive vehicle. In addition, leased cars typically require less money down than a purchased vehicle which is financed.
• Leasing lets you get a new car every few years.
• If you don’t expect to exceed the mileage allowance, leasing may be a good option for your business.
Buying a car – Most small business owners finance the cars that they purchase, as opposed to buying them outright. Loan payments are made up of both principal and interest. As you make your monthly payment, the principal portion will reduce your total loan balance. Once paid off, you own the car free and clear.
What You Can Deduct – There are two ways to take a deduction for a vehicle that you own. If you have financed the vehicle, the interest portion of your payments is deductible up to $300 per month. In addition, the CRA allows you to take a Capital Cost Allowance (CCA) deduction each year. This is commonly known as depreciation. For the first year that you put the car into use, you can deduct 15% of the cost. In the second and all remaining years, you can deduct 30% of the declining balance of the cost.
To illustrate – Company A purchases a new vehicle for $15,000.
• Year 1, the CCA is $2,250 — calculated as $15,000 x 15%.
• Year 2, the CCA is $3,825 — calculated as $15,000 – $2,250 = $12,750 x 30%
• Year 3, the CCA is $2,678 — calculated as $12,750 – $3,825 = $ 8,925 x 30%
This calculation will continue until the vehicle has been depreciated in full.
With the CRA luxury automobile limitation of $30,000 (before HST), the total CCA is limited to that amount. If you purchase a car for $40,000, you will be limited to $30,000 worth of depreciation over the life of the car. If you have financed the car, however, you can deduct monthly interest paid up to $300. This means that you may be able to deduct interest on the full $40,000 cost of the car, as long as it doesn’t exceed $300 each month.
Both interest and depreciation are deducted based upon the business use percentage.
Who Benefits Most – Purchasing a vehicle is a good option in many situations including;
• You intend to keep the car for several years
• You drive extensively and expect to exceed the mileage limitation that a leased car would have
• Tax deductions can be higher, however, they take longer to realize than leasing
Buying versus Leasing – What Else Should I Consider?
When deciding whether or not to buy or lease a company vehicle, there are a few other matters to consider.
Timing of Transaction – Whether you purchase a car on January 1 or December 1, you are entitled to the 15% CCA. If you lease the car, however, you can only deduct the actual lease payments that you make. If you leased the car on January 1, you would be able to deduct 12 months of lease payments, but if you leased the car on December 1, you would only be entitled to deduct 1 month of lease payments.
Gains and Losses – If you sell or trade-in a purchased vehicle, you could realize a taxable gain or loss if you receive more or less than the car’s book value. Book value is determined by taking the original cost and subtracting the total CCA to date for that vehicle.
Leased vehicles, on the other hand, have no gain or loss when you turn them in as you do not own the vehicle.
Other Vehicle Expenses – Certain automobile expenses are deductible, whether you lease or buy. Repairs and maintenance, gasoline, and fees are deductible in either situation. The amount of the tax deduction is based upon the percentage of business use of the vehicle.
When making the ‘buy versus lease” decision, you should consider what the intended purpose of the vehicle is and how frequently it will be used. In addition, the company’s financial ability to make a downpayment, as well as monthly payments should be determined. Finally, analyze your tax benefit to help you select which option is best for your company. As you can see, there is no definitive answer to the buy versus lease question. Ultimately, the decision is based entirely on your situation.