It may be hard to believe, but, filing taxes can be one of the benefits of owning your own business. The reason? Having business income gives you more options for tax reductions than a T4 slip. However, there is a catch - knowledge. Without proper knowledge, tax reduction can quickly become tax evasion.
To 'beat the taxman', you'll need someone on your side who knows the complex and often tedious tax rules inside-out - a good accountant. However, unless your accountant is auditing your books, you still remain responsible for your taxes, so it's best to prepare yourself with at least a basic knowledge of tax preparation.
The first objective of the tax game is to play within the rules. The second is to maximize your tax savings. The third is to keep your tax accountant's costs to a minimum. To achieve these objectives, take advantage of as many legal write-offs as you can and, while tapping the full expertise of your professional accountant, keep costs as low as possible. To accomplish this, you'll need to understand the various types of tax deductions that you are allowed and be organized.
Whether you have a bookkeeper and customized accounting software or you're tracking your income and expenses on a simple spreadsheet, it is important to plan and organize your reports so that you and your accountant understand them. The more those reports accurately meet your accountant's needs, the lower your year-end accounting bill will be. Speak to your accountant. Learn how they want to receive your information, which reports are useful and how you should organize your back-up material.
The Deductions Everyone Should Know
In broad strokes, you can deduct all reasonable expenses that you incur for the sole purpose of earning business income. It is important to have evidence to prove these expenses and keep the evidence for six years from the year for which you filed your business tax return.
From paper clips to computers to cars, as long as the primary use is for your business, you can deduct it. However, the way you claim the deduction for each of these items can vary significantly. Your accountant can help you with the details but, generally, you can deduct 100% of the cost of the following.
- Advertising (rules differ for non-Canadian media)
- Accounting, consulting and legal fees
- Business tax, fees, licences, dues, memberships, and subscriptions
- Delivery and freight
- Loan and credit card interest
- Maintenance & repairs
- Health & dental insurance premiums (assuming these benefits are offered to all employees. If you have no employees there is a maximum amount you can claim.)
- Office expenses & supplies
- Business/Office Rent
- Business travel (including travel for two conventions related to your business each year)
- Business telephone and utilities
- Vehicle expenses for vehicles used 100% for business purposes.
- Any business purchase valued under $200
The following are expenses for which only partial deductions are usually allowed:
- Meals & entertainment - typically 50% can be claimed
- Unless the vehicle is used solely for business purposes, only the portion of vehicle expenses equal to the portion of business use is allowed. This includes gas, oil, maintenance, insurance and licenses and loan interest or lease costs.
- Computers, equipment and cars purchased for your business - major purchases are usually subject to depreciation expense (Capital Cost Allowance in tax terms) which is affected by the nature of the asset. Again, look to your accountant for their expertise.
A Few Pleasant Surprises
Very often it is not what you do in your business that affects tax deductions but how you do it. For example, if you take six employees to a restaurant, you can claim 50% of the bill. If, instead, you create a company sporting or social event for those same six employees, you can claim the full cost. (Sorry, green fees however, are not deductible.) You achieve the same business objectives but double your tax deduction. Talk to your accountant about this and other pleasant tax surprises such as :
- Using a provision for bad debts as a means of deferring the payment of tax.
- Certain household expenses are deductible if you work from home.
- If you operate as a sole proprietor, you can apply losses against other income.
- While you can't deduct the cost of your business clothes you can deduct the cost of a uniform. Consider a uniform for your business.
Don't Even Think About It
While there are creative tax strategies, there are also serious tax caveats. The worst way to lose the tax game is by cheating. Attempt to include the wrong deductions and you may be asking for an audit. So avoid the following:
- Personal and domestic expenses not eligible for the "business-use-of-home" deduction
- Investments purchased for personal use
- Fines for illegal acts including traffic violations and related professional fees paid to defend these fines in court
Incorporate to Save Taxes
If your business is not already incorporated, incorporating can be a valuable strategy for tax reduction. While it comes with some legal and administrative hassles, you are often well compensated for these through tax savings. Incorporation is worth considering if you are:
- growing the business
- building a long term strategy
- increasing your receivables
- increasing your inventory
- purchasing assets
For more information on the benefits of incorporating, read "Should you Incorporate?".
Plan & Save
Reducing the tax you pay can be simple if you have the knowledge and plan ahead. Consider the following strategies for your business and discuss other possibilities with your accountant.
- Use tax splitting as a way of reducing tax liability
- Employ your family
- Draw a salary package that minimizes your tax liability.
The key to winning the tax game is knowledge, organization and a good tax accountant. Learn the rules - especially those that are particularly relevant to your business and your lifestyle - maximize your deductions and minimize your accounting bill. Yes, you can 'beat the taxman'.