One of the more advantageous things about owning your own business can be the deductions. As a corporation, or even a self-employed person, there are many “write-offs” that you can claim for tax purposes that you may not have been able to previously. These deductions can make a difference when it comes to your tax owing, or even result in a tax refund. Below are our tips on how to take advantage as a business owner:
- Be aware
Being aware of what qualifies as a business expense will ensure you can take advantage of these deductions. Essentially, any expense for the business can be deducted to some extent if it is used to assist in collecting revenue. Common expenses for businesses that qualify for deductions are (but not limited to) advertising, start-up costs, business taxes/fees/licenses, insurance, meals/entertainment, legal/accounting fees, office expenses, supplies, home office, vehicle, telephone, salaries and travel.
- Keep track
In order to be able to take advantage of these deductions, there must be records of the purchases of these items. It is required to keep copies of receipts/invoices for any business expenses that are written off. As well, it is important to book keep your purchases to ensure they are being tracked properly and none are missed. Any expenses without receipts/invoicing should not be claimed as part of a deduction. In an audit, CRA may require copies of receipts, as well as copies of your bookkeeping as proof. Failure to provide proof may result in taxes owing.
- Know the limits
As previously stated, any expense for business can be deducted to some extent if used to assist in collecting revenue. However, there are some exceptions. The main exception to keep in mind is personal use versus business use. For example, your cellphone maybe used for business calls or checking your business email. However, for most people, they will still text and call their friends/family on their cellphones or use social media. Therefore, the overall cost of your cellphone is not 100% used for business, however a portion of it is. It is important to only claim a reasonable amount of expenses that can be incurred both personally and for the business; ie. only the business portion. This is true for home office costs, vehicle costs, cellphones, travel or any other expenses with some personal use. It is important to have proof and claim only the portion that is related to business. See our posts for more information for home office deductions “Home Office – Is This an Eligible Deduction For You?” and vehicle deductions “What is an Eligible Deduction For Your Vehicle Expenses?”.
Another exception is meals and entertainment. Meals and entertainment used to gain clients and collect revenue can be deducted, however typically only 50% of the cost is eligible for deduction.
- Sales tax
When tracking expenses, it is also important to note if GST/HST is a factor. If you record GST collected on sales, you must also track the GST/HST paid on your expenses. This GST/HST paid will offset how much GST/HST you owe. It is important to make sure that expenses that include GST/HST are tracked without GST/HST included, and the GST/HST is tracked separately. It is also important to note that some expenses maybe exempt from GST/HST or zero-rated and thus checking your receipts/invoices is the most reliable way to check whether there was GST/HST charged, and therefore how much you can track. With expenses that have a personal use portion, and meals and entertainment, it is important to also only track the business portion of the GST/HST paid on those expenses.
Overall, it is important as a business owner to be aware of what can qualify as a deduction, come tax season it can make a big difference. At Jibe, we help with the tracking of business expenses for many clients (self-employed or corporations), and handle bookkeeping and tax filing!