Accounting and Tax Treatment of Computer Hardware and other Fixed Assets

Investment in capital items such as computers, furniture, equipment and cars can cause confusion for small business owners.  Since these are purchases that affect the cash flow of the business, it seems that they should be accounted for as expenses just as you would reflect office supplies or rent.  There are however special rules for any acquisitions that qualify as “fixed assets”. 

A fixed asset, simply speaking, is an acquisition that provides a long term economic benefit to the business. In other words, any business purchases that has a useful life that extends beyond one year, will usually qualify as a fixed asset. 

From an accounting perspective, fixed assets as their category implies, are reflected as assets on the Balance Sheet.  This means that they when they are initially entered into your accounting system, they will have no immediate impact on your bottom line.  It is only with the passage of time that a portion of these costs become an expense, which requires an assessment regarding the useful life of the asset.  For example you might purchase some computer hardware that you expect to use for about 3 years after which you will need to replace it.   At the end of the 3 years, however, it may still have some value (you may be able to sell it) which is referred to as salvage value.  This too needs to be evaluated.  Once these factors are determined (since you are not psychic, they do not have to be exact – just reasonable) you have enough information to calculate your depreciation expense.  The depreciation expense is the amount by which you reduce your fixed asset value on an annual basis. 

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Is Facebook’s Valuation Justified? A Comparison of Key Financial Metrics to Apple and Google

The recent release of Facebook's S-1, the financial filings that are required to be publicly available prior to filing an IPO, has created a media frenzy. The report has been dissected and analyzed extensively, financial news networks can’t seem to stop talking about it and it seems that people who have never heard of an IPO are discussing it, fittingly, on their Facebook pages.   The most controversial issue, of course, is whether Facebook is actually worth $100 Billion. 

Although Facebook is unique in its global reach and ubiquity, the starting point for any valuation is to compare it with similar businesses.  I have chosen Apple and Google, given the similarity of their business models and their respective global dominance, to compare certain key metrics:

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Preparing your Small Business and Self Employed Tax Return with UFile Tax Software

Unincorporated Small Business and Self Employed owners are fortunate to be in an age where preparing tax returns have been significantly simplified.  Not only are calculations automated, but contemporary tax software provide interfaces which make input of data fairly straightforward.  Tax software also help taxpayers to optimize their deductions, so preparing your own taxes has never been easier.  Of course tax software is still only a tool and is not a replacement for tax expertise.  Business owners should be cautioned that, when in doubt, it is always best to consult with an an accountant. 

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Essential Facts about Shareholder Loans for Incorporated Small Business Owners

There are three primary ways in which you, as an owner-manager, can withdraw funds from your corporation.  You can pay yourself a salary, you can declare a dividend or you can borrow money from the corporation.  When you borrow money from your own corporation the Canada Revenue Agency (CRA) has put into place strict rules as to when you have to repay the loan.  This is essentially to ensure that the owner-manager does not avoid paying taxes indefinitely. 

The basic rule for shareholders loans is that they must be paid in the fiscal year following the year in which the loan was taken.  For example, if your fiscal year end is December 31 and you borrow money in 2011, then it must be repaid before December 31, 2012.  Failure to repay will result in the loan amounts being included in the shareholder’s income in the year in which the loan was taken, which in this case would be 2011.  The loan must also not be considered to be a series of loans and repayments eg. Repaying an amount at the end of 2011 only to borrow again in early 2012. 

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Should you register for GST/HST and QST and What it Means to Be Zero Rated

One of the first tax questions you will be faced with as a small business owner or self employed worker is whether you need to register for GST/HST & QST.  The answer in most cases is that if you anticipate that your annual gross revenues (total sales) are going to exceed $30,000, then you should register for GST/HST and QST UNLESS you are considered to be providing a zero rated or tax exempt product or service, in which case you are not required to register.

A more detailed analysis of whether you are required to register for GST-QST

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Top 6 Signs Your Small Business Might Need a New Accountant

I met with a small business owner recently who had just purchased a retail business and was looking for a new accountant.  It seems that the current accountant was reviewing her books on a quarterly basis, preparing financial statements and doing the year-end tax returns – all typical accountant stuff.  The problem was that the accountant, while charging this small business a fairly significant amount of money, was not really adding any value to their business.   The bookkeeping, which was done by the previous business owner, was still being entered manually in ledgers (!). The quarterly accounting review consisted of checking the ledgers for mathematical accuracy and ensuring no major deductions had been missed without any discussion regarding the performance of the business.  Worst of all, the accountant was not responding to the client’s requests for a meeting.

There are many great accountants out there, however it is important to ensure that you are hiring someone who will compliment your business and add value.  Below are some of the qualities that should be considered either with respect to your accountant:

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How to Update Wave Accounting for the 2012 QST Rate Increase

As of January 1^st, 2012 the Quebec Sales Tax (QST Rate) which had gone up from 7.5% to 8.5% on January 1, 2011 will now increase to 9.5%.  The effective sales tax in Quebec will go up from 13.925% to 14.975%.  Since QST is calculated on the net amount + GST, the rate is not 14.5% but 14.975% .  In other words the effective QST rate is 9.75%.  Business owners will need to update their invoicing and accounting systems accordingly to ensure that the rate is properly reflected.

If you are using Wave Accounting, the update to the rates is fairly straightforward, with one little quirk.  Since Wave, unlike Quickbooks, does not allow for the QST to be calculated on the GST, the effective rate has to entered manually.  This is done as follows:

To update Quickbooks for the tax rate increase, please see “Updating Quickbooks for the 2011 QST Increase”.  The procedure is essentially identical except for rates.

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12 Tax Tips for the Self Employed

The self-employed lifestyle holds great promise when you first embark upon it, however you quickly find yourself doing things that you would never have dreamed of.  You are expected to take on role of salesperson, market researcher, accountant, lawyer and social media expert, while not getting paid for any of it.  Your available funds do not allow for outsourcing and at times you are not even aware of what you don’t know.  Luckily the internet provides a wealth of tips and tricks to make these tasks a little easier, and with a little discipline, some aspects of your self-employed existence can be made much simpler. Ensuring that you keep on top of your finances and tax obligations is one of those much hated, but absolutely necessary tasks for which it is essential to have a system in place, even if you do have an accountant. 

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Deferred Revenue and its Impact on your Small Business

Most small business owners are familiar with the concept of revenues, which is essentially the total sales of their product or service, to customers and clients, prior to deducting any costs.  Revenues are a crucial component of business’ profit and loss statement and it is essential that they are accurate so that the business owners may effectively analyze the profitability of their businesses.  Additionally there are third parties for which the accuracy of the revenues, and corresponding financial statements, is essential for effective decision making.  Third parties include tax authorities, banks, partners and key employees (on which remuneration/bonuses might be based). 

At first glance the calculation of total sales/revenues seems fairly straightforward.  Add up your total sales (or ideally have your accounting software do it for you) and voila – you have your gross sales. There are, however, several types of adjustments that need to be made depending on the nature of the sale, including any amounts that might be construed as deferred revenues.  Essentially (and quite simply) deferred revenues represent sales that are invoiced their customers now for goods or services to be provided at a later date.   Revenue recognition principles dictate that, unless the sale has actually occurred, the revenue cannot be recognized.  In other words these amounts must be reflected as deferred revenues.  Once the product or service has been delivered or performed, the deferred revenue is then considered to be an actual sale/revenue.  To a non-accountant, this can sound like a lot of mumbo jumbo.  The examples of deferred revenue below should help illustrate the concept more clearly:

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Tax Tips: Medical Expenses Tax Credit

Canadian taxpayers are allowed to claim their medical expenses as a deduction subject to certain restrictions and limits.  Luckily your root canal and eyeglasses are deductible, but unfortunately your nose job is no longer eligible to be included in your medical expenses (cosmetic surgery was made ineligible as of March 5, 2010) nor is a hot tub that you install in your home, even if prescribed by your doctor.   Eligible medical expenses also have to reach a specific threshold before they can actually start reducing your taxes payable.  Details, pertaining to the medical tax credit, to keep in mind prior to deducting medical expenses are discussed below:

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