20 Essential Tax Facts for Small Business Owners

As the income tax filing deadline for the year approaches small business owners and their accountants are starting to feel the pressure.  Receipts need to located, invoices entered, bank statements reconciled.  Accountants’ offices are littered with shoeboxes and accordion folders while tax return checklists and missing info lists are being compiled and checked off.  Google is starting to note an increase in tax related searches as business owners and accountants search for clarity on a variety of tax regulations, deductions and deadlines .

In an effort to assist business owners understand their obligations, gain a better understanding of the tax filing process and provide some structure to the chaos, I have prepared a list of some essential facts and resources that should help make the process a little more manageable: 

Tax Deductions:

Major business related tax deductions/expenses include:

  • Direct costs used to run your business.  Eg. beans and other assorted ingredients used for making bean dip are tax deductible.
  • Wages, salaries, fringe benefits and subcontracting fees
  • Rent, Utilities, Insurance, property taxes incurred for office space
  • Office supplies, postage, courier
  • Travel costs to conferences, business trips etc.
  • Transportation costs like public transit passes and taxis fares incurred for business (make a note of the client on the taxi receipt)
  • Subscriptions to business publications
  • Professional and industry dues
  • Accounting, legal and business consulting fees
  • Bank charges and interest on loans, including credit cards, relating to the business
  • Credit card fees incurred on payments from customers.
  1. Any expenses that are incurred to earn business income are considered to be deductible.  For example a writer can expense cost of paper, payments to writing associations, research costs and home office expenses.
  2. With certain exceptions, only 50% of meals and entertainment can be written off.  You must be able to demonstrate that the meals related to earning business income.  It is a good practice to write the name of the client/customer on all receipts.
  3. Life insurance premiums are not tax deductible unless the beneficiary is the business.
  4. Purchases of “Capital Assets”, i.e. larger ticket items (usually higher than $500) cannot all be expensed in one year.  Instead the government allows for what is referred to as CCA which is depreciation rate over a period of time at specific rates.  The class to which the asset belongs and the rate at which it can be depreciated is specified  by the Canada Revenue Agency.  Note that CCA cannot used to create a loss for your business.
  5. Computer hardware purchased in 2010 can be written off in it’s entirety .
  6. Automobile Expenses including lease costs, interest on financing, repairs, gas and rental of vehicles for business purposes  are deductible but are subject to specific rules.  Keep in mind that revenue agencies tend to require a log book i.e. a record of mileage, dates and clients.  As long as you can demonstrate that they relate to business they are deductible.  There are also limits to how much you can deduct with respect to lease payments or car costs (sadly, Ferraris are not deductible in their entirety).
  7. Home office expenses can be used to reduce business income as long as the office represents your principal place of business.  Deduction is based on the percentage of your home that you can allocate to the home office.
  8. Business losses, excluding CCA and home office expenses, can be used to reduce income from other sources and corresponding income taxes. Sustained losses over a few years will however lead the CRA to look more closely at your business.  As such it is important for business owners to take care that there is a reasonable expectation of profit.
  9. There are specific rules with respect to tax deductions for clothing expenses.

Tax Administration:

  1. Sole proprietorships and unincorporated businesses are required to include their business income and expenses in their personal tax returns by filling out the T-2125. This form can be found in all online tax filing software including Ufile and TurboTax.  A separate tax return is not necessary.
  2. Corporations are required to file a separate tax return.  Given the more complex nature of a corporate tax return it is usually a good idea to get a professional accountant to help with this.
  3. Care should be taken to ensure that the business is not regarded as a hobby otherwise tax deductions/expenses that exceed the income of the business will not be allowed.
  4. Business should record their revenues and expenses based on the accrual method i.e. when the sale or expense is made rather than when cash is received.
  5. It is extremely important to keep all receipts, bills, invoices, cancelled cheques, deposit slips.  If you have any doubts, then keep it! As well ensure that you retain all documents received from the government including assessments and notices.  

Tax Filing Deadlines:

  1. The income taxfiling deadline for unincorporated businesses in Canada is June 15th.  However taxes payable are due on April 30th, after which any amounts due start to accrue interest.  Penalties will apply if the tax return is not filed by June 15th.
  2. Incorporated entities are required to file their tax returns 6 months after their year end,  but similar to unincorporated business, taxes payable are due 3 months after year end.   Similar interest and penalty provisions apply.
  3. For sole proprietorships who are registered for GST/HST/QST, have less than $1.5 million in sales and have selected an annual reporting period
  4. The deadine for filing their GST-QST returns is June 15th, although taxes payable start to accrue interest if not paid by April 30th.
  5. T4s and RL-1s along with payroll summaries and any underpayments are due by February 28th.
  6. In Quebec, CSST Summaries and amounts due (in Quebec) are due by March 15th.
  7. Tax instalments are due for small business that estimate they will owe in excess of $3,000 and are due March 15,June 15,September 15, and December 15, 2011.  You can either base instalment payments on prior year amounts or calculate current year taxes. 

Although preparation for tax filing is rarely an exciting time for small business owners,  understanding what it entails and being prepared can make it a little less harrowing.  A good accounting system will significantly streamline the process, and can actually result in significant savings by increasing tax deductions (filing all receipts and bills) and eliminating potential interest and penalties.  A well organized set of books can also reduce the pain and possibility of audits.   

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Ronika Khanna is Montreal based accountant who helps small businesses achieve their financial goals.  To receive regular updates of articles pertaining to small business, accounting, tax and other topics of interest to business owners you can sign up here.  You can also follow her on Facebook or Twitter.