Small Business Deductions
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.
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