10 Year End Tax Strategies to help Small Business Owners Improve their Bottom Line

Ready or not, the holiday season is upon us and the end of the year is fast approaching.  While it is quite a nice time of year (cold weather notwithstanding) there are many additional stresses –purchasing the perfect Christmas sweater, managing the logistics of family holiday time, making travel arrangements, all while trying to not to gain a million pounds.  This can be especially trying for the small business owner, who in addition to managing their business and the holidays, must carve out some time to ensure that there are ready for year end and maximizing their tax deductions while also planning for next year.  To help ease the stress I have compiled a list of tax tips to contemplate:

Organize:  For the procrastinators among us, this is an excellent time to start locating those receipts, bills, bank statements and government assessments and filing them (or at least compiling them for your accountant).  If you are maintaining your own accounting, you should be catching up on entering your sales and expenses and reconciling bank accounts.  It is also a good time to follow up with delinquent customers and clients before they claim penury due to inevitable holiday expenditures.  By getting a sense of your estimated profit for the year and other pertinent financial information, you can make more informed decisions about your bottom line.

Invest in the Business: Assuming that you are profitable and have sufficient cash flow, you should considering making purchases prior to the year end (for unincorporated businesses and those with December year ends).  Investing in office supplies, computer equipment, or a new ergonomically friendly chair can help reduce taxes and improve your bottom line.  Keep in mind that larger purchases cannot be deducted in their entirety; however depreciation rates are usually between 3 and 5 years

Write off Uncollectible Balances and Inventory: No matter how hard you try, there are certain customers who just won’t pay or specific inventory items that don’t sell .  Now is good time to make that evaluation and write off or reduce their value.  You can either set up a general provision for bad debts or inventory although to benefit from a reduction in taxes payable it is better to identify the specific balances and write them off.  Any items in inventory can be reduced to their specific net realizable value i.e. whatever you can expect to receive from sale of the items.   If you do plan to do this, it is always good to have backup to support revisions to value (an estimate from a customer, price list etc.)  

Pay Salaries to Family Members: If your spouse or children are actively involved in your business and have minimal income from other sources, consider paying them a reasonable salary.  This will allow you to reduce the taxable income of your small business as well as your combined family tax bill since your family members will likely pay tax at a lower marginal tax rate.  Salary payable may be accrued by the business as long as they are paid within 6 months thereby allowing for a deferral of taxes.

Salary or Dividend: If you are incorporated it is important to consider the best salary vs dividend allocation.  There are several considerations including RRSP contribution room (only allowed on salary), corporate tax rates and payroll taxes.  Alternatively, paying yourself only what you need and leaving the rest in the corporation, will allow you defer taxes as you will only pay the small business tax rate until you decide to withdraw the money from the corporation.

Quebec Residents Earning Over $100k: A new tax bracket has been added for residents of Quebec who earn over $100,000 which is scheduled to apply to the 2013 calendar year.  Small business owners should consider maximizing their salary or profit in the current fiscal year to save the additional 1.75% that will apply to income greater than $100,000.

Save for Retirement and Get a Tax Break: A no brainer for all Canadians who have contribution room and funds to spare is to invest in RRSPs. You can see your contribution room on your Notice of Assessment from Revenue Canada which is essentialy 18% of prior year’s earned income up to a maximum of $22,970 for 2012.  The tax savings from investing in RRSPs is your marginal tax rate multiplied by the contribution amount.

Contribute to Your Favourite Charities:  Donate by the end of the year to get the tax reduction on your 2012 returns.  Keep in mind that if you contribute over $200 the tax credit increases significantly, so be generous and reap the rewards.

Invest in your Health: If you have been putting off that dreaded trip to the dentist, let the potential reduction in your tax bill be an incentive.  As long as your medical expenses exceed 3% of your net income, you are entitled to a tax credit.

Time to Incorporate? Finally sole proprietors and unincorporated partnerships should ask themselves whether it might be time to incorporate which allow for tax deferral opportunities, although this is offset by higher administrative costs. 

Although year end tax planning can be a little overwhelming, particularly when there is so much else to do, it can be very satisfying to create order out of the chaos and know that your investment of time in your business  can reduce your tax bill and improve your bottom line.

Ronika Khanna is a Montreal Tax Accountant who helps small businesses with their tax planning needs.  Please sign up to receive articles pertaining to small business, accounting, tax and other occasional non business topics of interest.  You can also follow her on Facebook ,TwitterGoogle Plus or Linkedin