The temptation to start a small business or venture into self employment can be strong particularly for those who are unhappy with their existing employment situation. The freedom and flexibility that being your own boss seems to offer can be seductive, as is the potential for growth which you, as the business owner, can have full control over. You may have an idea or a particular skill that you believe is desirable to a specific target market and you are confident that once this target market is aware of your existence they will all be banging down your door. Consequently, you start your business by offering an amazing product or services, only to realize that building up a customer base is more challenging than you thought. Additionally, there are a number of other obstacles for which you do not have the expertise (done by another department when you were an employee) whether it is marketing, website development, legal research and accounting. Finally, you realize that you actually need a fairly sizable source of cash to maintain the business, deal with growth opportunities, whilst ensuring that you are able to support yourself.
The chart below, published by Statistics Canada available Key Business Statistics – July 2012 (this seems to be the latest data that is available), demonstrates the percentage of small and medium sized enterprises (SMEs) that actually survive over a five year period.
No deduction shall be made in respect of an outlay or expense except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property
If you are running a business of any size, it is essential that you have a system in place that allows you to get paid. A system can range in sophistication from a handwritten receipt to a software generated invoice which is part of an entity wide CRM system. To meet this need there are countless invoicing solutions available and many billions of dollars are spent annually on setting up systems to meet each business’ unique needs.
Almost all accounting software geared to small business owners and freelancers have built-in invoicing modules that integrate with your accounting. This is very useful when doing your books as you don’t have to worry about entering your invoicing manually and it allows you to track your accounts receivable and deposits into your bank account. There are also invoicing solutions that are not full-fledged accounting systems; however they usually integrate with the more popular software.
Accountants often get a bad rap when portrayed in movies and television. They tend to be boring, devoid of personality, weird or just socially awkward. Alternatively they are scheming and manipulative, and are often the device by which the rich are pushed into penury. They are almost always unsatisfied with their jobs and have secret dreams of pursuing something a little more exciting. This of course is unfair as being an accountant can be both fulfilling and exciting, depending on what you do with it. It also provides some measure of financial stability that makes one's goals and dreams more achievable.
There are some memorable accountant portrayals on television, which we have compiled below:
For Quebec taxpayers who have been trying to locate their RL-4 slips, the slip that your landlord usually provides, or the part on the tax forms or software where you would enter your property taxes (Schedule B), be advised that as of 2011, that this is no longer a specific tax credit. Prior to 2011, both property owners and renters could claim a portion of property taxes paid. This reduced income taxes payable for taxpayers whose total family income was under approximately $50k
However, per Revenue Quebec:
The property tax refund was replaced by the housing component of thesolidarity tax credit. As a result, landlords no longer have to provide their tenants with RL-4 slips, and Part E of Schedule B (which tenants had to complete to claim the refund) has been removed. To claim the solidarity tax credit, complete Schedule D.
Essentially, Revenue Quebec no longer allows for a credit that is based on specific property taxes paid. Rather, with the Solidarity Tax Credit, it determines whether you live in an eligible dwelling i.e. do you rent or own your home and calculates a monthly credit that is based on your total income. (The higher the income, the lower the credit, until it reaches $0). The solidarity tax credit is combined with the QST credit and is paid out to Quebec taxpayers on a monthly basis as long as they don’t exceed the income threshold. Generally speaking, a single taxpayer who owns or rents their home will be eligible for the full amount of solidarity tax credit if their income does not exceed $31,695, which is approximately $900. Net incomes between $31,695 and approximately $46,000 reduce the amount of the tax credit until the amount reaches nil. Keep in mind that, to receive the credit, you must register for direct deposit.
More details on the solidarity tax credit and where to register
Recently, a client received a notice from the CRA indicating that he had received a credit of $265. The explanation was simply that it was a hiring credit. Upon further research, we determined that the credit was a result of the provision in the 2011 budget that gave a credit to small business for hiring additional employees.
To be eligible for the credit, small businesses are not required to prepare any additional reporting. The small business hiring credit is simply calculated based on the increase in employment insurance (EI) premiums paid in 2011 over 2010. The maximum amount that any business is eligible to receive is $1,000.
Since the calculation is based on amounts reported on your T4 slips for 2010 and 2011, you are only eligible if the slips have been filed for these calendar years.
It appears that the amount of the credit is 100% of the excess of 2011 EI premiums over the 2010 EI premiums, up to aforementioned limit of $1,000.
The credit will not actually be paid out immediately, but applied to your payroll account.
New businesses (like my client) will receive the credit. Their 2010 EI premiums will be calculated at $0.
Note that since the EI credit should reduce your payroll expense, it will reduce your business expense and by extension, increase profits. The journal entry is as follows:
Dr. Payroll (EI) Liability
Cr. Payroll Expense
Once you receive your payroll statement from Revenue Canada indicating the amount of the credit, you may reduce the payroll liability owing to them by the same amount. You cannot, however, estimate the amount of the credit before you have received notification from Revenue Canada.
The deadline to file our tax returns is quickly approaching, resulting in slight feelings of panic for some individuals and small business owners. As someone who provides tax services for a living, I have found that (like with many things) the stress is far more manageable when you know exactly what you have to do (rather than a vague idea that documents need to be located and forms need to be filled in). One of the best ways to mitigate this stress is to prepare a checklist. If you are looking for a comprehensive tax checklist , David at The Tax Issue has prepared an excellent one and I recommend that you check it out.
The checklist below has some of the more common income, deductions and credits that the majority of taxpayers are likely to have:
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.
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:
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.