Most people don’t enjoy doing their taxes. Trying to navigate the complex rules and regulations of the CRA makes life a bit harder, especially if you are running a small business.
The good news is it doesn’t have to stay that way. Lowering your financial obligation to the CRA by legally using tax deductions is wise. This creates pre-tax wealth that can be leveraged by the business owner or for future capital investment.
As a leading provider of accounting services in Niagara, we at HQ Accounting want to help you get the most out of your small business tax deductions.
This guide will discuss what kinds of expenses qualify as business expenses and how you can take advantage of them on your next tax return.
What is a Tax Deduction?
A tax deduction is a method to reduce the amount of income subject to tax. Essentially, it’s a tax-saving measure that allows you to reduce how much taxable income your small business has after all your expenses are considered and before taxes are calculated.
For example, if your IT consulting small business earned $100,000 during a year but spent $60,000 on work-related expenses like car costs and travel, then only $40,000 would be considered taxable income.
As long as these expenses meet specific criteria set by law (like being business related), they can be claimed as deductions on your return and will save you a lot of money at tax time.
Top Tax Deductions from Small Business Owners
Business expenses are any outlays that you incur in the course of running your business. These outlays can be deducted from your business income to determine your net profit or loss, which is then used to determine how much tax you owe.
To quality, these expenses must meet one of these criteria:
- Be used exclusively in operating your small business.
- Be used in the space your small business operates.
- Be used while performing the tasks of your small business.
As long as the expense meets one of these requirements, it can be used to reduce your small business’s taxable profit.
1 – Start-up Costs
If you’re starting a business, there are a ton of things that can be written off. One of the most common deductions is start-up costs, including incorporation fees and legal fees for setting up your company.
Start-up expenses are considered capital expenses, so they should be tax deductible depending on when they occurred during the year. If you don’t know what’s deductible and what isn’t in Canada – you may want to reach out to our bookkeeping services in Niagara.
2 – Advertising & Marketing
Advertising is something you do to get new customers, while marketing is what you do to keep your current customers. Therefore, marketing costs can be deducted as a business expense.
Advertising expenses are spent communicating with potential or existing customers to introduce a product or service, create public awareness, build its image and increase demand for it.
This can be anything from a television ad to passing out flyers to the software you use for email promotions.
3 – Business/Office Supplies
A business supply is any property purchased by your business to be used directly in its operations or production of income. For example, pens and paper for the office receptionist or snowblowers for the maintenance team during winter months.
If you bought something used exclusively in your office and helped keep it running smoothly (and therefore earned more money), it counts!
4 – Rent
Rent is a business expense. You can deduct it from your income when filing your taxes. As a leading tax accountant in Niagara, we frequently help small business owners differentiate between the rent paid in Canada and any rent for storage spaces across the border.
5 – Business Insurance
The CRA has defined business insurance as a capital expense, which means you can deduct the premiums you paid for your business insurance in the year you’re filing. This includes your property, inventory, assets, or insurance covering equipment.
6 – Telephone & Internet
If you use your mobile phone for business purposes, you can deduct the cost of your monthly bill.
Communication equipment is also wrapped into this category. That can be the rental fees for a modem or a range extender for a WiFi signal in your business lobby.
7 – Utilities
In Canada, utilities are everything you pay to have water, heat, and electricity. If your landlord or property management company includes these costs in your rent or lease, then they’re not tax deductible in this category. They will be included in the rent instead. Sometimes this can also consist of extra utilities, like parking attendants or security.
8 – Salaries, Wages & Benefits
Salary, wages, and benefits paid to employees are deductible. This includes payments for overtime work and statutory holidays. This is a massive category because it contains a wide range of benefits. You absolutely should speak with our accounting services in Niagara if you have employees.
9 – Independent Contractors
Independent contractors (ICs) are self-employed and, therefore, can deduct expenses associated with their business, but you don’t get to write off their salaries. Instead, you can write off the payment toward them as professional fees. There are some other designations we can help you uncover as well.
10 – Meals & Entertainment
You are allowed to deduct meals and entertainment expenses (that you can’t claim as capital cost allowance) if they were:
- incurred while traveling away from home for business purposes
- not reimbursed by your business
- considered reasonable in the circumstances
- incurred on a regular or continuous basis
You have to be a little careful with the definition of “reasonable.” For example, a company trip to dinner for a great month’s work is fine, but taking only the male team members to an adult venue will not go over well with the CRA.
The gray area of this deduction is pretty broad, so you should present everything to your bookkeeping services in Niagara provider to ensure no mistakes are made.
11 – Travel & Motor Vehicles
As you’re well aware, a car is necessary in today’s world. Whether it’s your commute or the drive to work, there are many expenses associated with your business owning and operating a vehicle.
How do you calculate these deductions? Make sure everything is documented through receipts or logbooks, so there isn’t any confusion down the road when filing taxes.
Most importantly, keep track of kilometers traveled each day through written logs (for regular trips) or by using an app such as TripLogger Pro, which automatically tracks distances traveled via the GPS function on most smartphones.
12 – Delivery & Shipping Costs
You can deduct the cost of shipping your products and goods to customers in Canada or abroad as long as they’re not included in the item’s price. To do that, note down how much it costs to deliver your product(s), then record that amount.
The best way to track these costs is probably by using some form of automated software for accounting like Odoo or QuickBooks.
13 – Professional Fees
If you hire an accountant, lawyer, or bookkeeper to help with your business, those fees are deductible. This is directly complimented by the following item below:
14 – Accounting & Tax Preparation
A tax accountant is a professional trained in accounting and taxation law, which means they understand how to prepare tax returns for individuals and corporations. The fees for using these services are entirely deductible. So it makes financial sense to hire our team of tax accountants in Niagara.
15 – Depreciation
Depreciation is a tax deduction that allows you to spread the cost of an asset over its useful life. You can only claim depreciation on assets purchased or acquired during the tax year and only if the asset is used for business or income-earning purposes.
16 – Home Office
Your home office is a space in your home where you regularly conduct business. You can deduct a percentage of your rent or mortgage, utilities, insurance, and maintenance costs if you have a home office. You can also deduct the portion of the space you use for business purposes.
Inventory & COGS
There are two other critical areas you need to consider – inventory of your current goods and COGS (cost of goods sold).
Inventory calculates COGS, which includes any financial resources spent on raw materials and labor required to manufacture or produce an item.
For a small farming business, this may be the seed, harvesting, and equipment to grow and produce a crop. This could be the ingredients purchased and heating expenses to run the stove for a restaurant.
These are so important because they can dramatically lower your tax obligation by significant portions each year.
No Matter What – Keep Good Records
It’s essential to keep good records, especially if you want to save some money come tax time. The more organized your bookkeeping is, the easier it will be for you to get a deduction.
If you have ever used an app like Expense IQ or Mint, then you know how instrumental they can be in helping manage your spending and saving habits. They make it easy to track receipts and expenses (and even categorize them) so that when tax season rolls around, all of your information is neatly organized in one place.
Wrapping it Up
In closing, there are a great many deductions that you can take on your Canadian taxes. The key to this is ensuring that you track all your business expenses throughout the year.
We at HQ Accounting can make suggestions to help organize your annual record keeping so that when we put your taxes together, it is a quick and painless process that maximizes as many deductions as possible. There are some others we didn’t even cover in this article.
The point is taxes are complex. You hire a plumber when you have a leak. You talk to a mechanic when your car needs repair. When it comes to ensuring your business’s financial health is always at its best – speak to our experts at HQ Accounting.
Change your future and book your 15-minute discovery call with our accounting services in Niagara today!