A Primer On Business Expenses
Hello All,
The question that almost every small business owner wants to know, especially at this time of year , is what expenses can I deduct to lower how much I owe in tax. This newsletter is not going to reveal anything groundbreaking, but hopefully it is a useful reminder for expenses that you might have overlooked.
First, lets start by looking at what a business expense is. As defined by Revenue Canada it is “a cost you incur for the sole purpose of earning business income.”
This means that as a small business owner, you can reduce your profit and corresponding taxes payable by claiming expenses that relate to your business. Of course like with all things tax , there are various degrees of complexity around the expenses that you can claim.
The most important piece of advice that I give to my clients and newsletters peeps with respect to expenses is to be reasonable. You want to put yourself in the mindset of the revenue agencies who check amounts that fall outside of the norm. There will be a range for what is normal based on your revenues earned and the industry that you are in. Anything outside of this range is likely to be flagged. If it is flagged, then CRA, who follow a risk based approach, are going to determine if it is worth their time to audit. Keep in mind that an audit can simply be a written request for details so it doesn’t take too much in terms of their resources.
The most common business expenses that can be deducted include :
Wages/Salaries which should match your payroll reports
Payments to subcontractors for which you should have invoices
Direct costs of making your product or providing your service which can be materials, shipping, packaging or technology specific to your service
Advertising expenses which includes marketing, gifts to clients, web hosting, trade shows etc.
Bank charges including credit card fees that you pay for accepting credit cards, interest on loans/business credit cards, annual fees on credit cards etc.
Subscriptions for software, apps, publications that relate directly to your business
Home office expenses representing the % of expenses relating to your home that are exclusively used as a home office (e.g. mortgage interest or rent, utilities, property taxes, insurance etc.)
Car expenses including gas, registration, parking, repairs and lease or financing expenses. Plus depreciation if you own the car.
Fees paid to your accountant or lawyer
Telephone and internet which can be claimed based on the percentage used for business
Travel to meet with clients or attend conferences
Meals and entertainment claimable if it is with a business client, partner or colleague and business is discussed.
Office supplies which is a bit of catch all but includes items relating to your office.
More details on expenses can be found on the CRA website.
The second most important piece of advice that I give is to have a separate bank and credit card for your business. This is especially useful when you are compiling your expenses as you know where to find most of your transactions. To put some perspective on it: if your marginal tax rate is 40% and you forget to include an expense of $100, you are paying $40 extra in taxes. Of course, many business owners don’t have separate bank accounts. In this case I strongly recommend having a process whereby all business expenses are noted on a spreadsheet or document during the year so that it isn’t overlooked.
Finally, it is essential to have source receipts/bills/invoices for all of your expenses. In most cases, the charge on the bank or credit card statement won’t be sufficient in case of an audit.
Every business owner should deduct the expenses that are required to run their businesses and therefore to which they are entitled. When in doubt about an expense, it can useful to think about how comfortable you would be in the event that you have to justify it in front of a CRA auditor.
Blog Posts
As the tax deadline approaches, small businesses which include the self employed, freelancers and anyone who is unincorporated but earns money from their business (which can include ad revenues, ridesharing, affiliate sales etc.) must complete a T2125 that is an add-on to their personal tax returns. I have some guidance on this plus some info on your small business expenses (similar to but in greater detail to those listed above).
How to Prepare the T2125 if you are a Small or Self Employed Business Owner
While being self employed comes with numerous benefits, there are also many challenges. One of them is ensuring that you are aware of, and fulfill, your tax obligations on a timely basis. In the begin
20 Essential Tax Facts for Small Business Owners
Probably the most popular question posed to accountants and tax preparers (especially around this time of year) is what types of expenses are deductible. The short answer is that an expense is conside
Small Business Articles
ChatGPT for Small Business: Most of you have likely heard about ChatGPT and how it is going to revolutionize how we do business. Whether this is true or simply the latest tech craze, AI can very useful if you know how to leverage its capabilities. See the article for specific ways to use it.
Inflation Rate Falls to 4.2% in March: This is the lowest it has been since August 2021. Of course people are still paying more in interest for their homes and the price of groceries is still going up although at a lower rate.
Tax Stuff:
CRA Workers Strike Impact: Many of you have probably heard that 35,000 CRA workers are among approximately 155,000 government employees that are on strike. Given that there is a significant amount of automation in processing tax returns, it won’t affect that many people. Anyone who paper files their tax return, however, will likely see significant delays. Unfortunately, the deadline to file is still May 1st.
Income Taxes 101: An article from the Globe and Mail breaks down everything you need to do to file your taxes on time.
CRA Common Mistakes and Adjustments: Every year CRA releases a list of the most common adjustments and errors in people’s tax returns including not reporting a change in address, moving expenses not claimed and medical expenses without the required information
QuickBooks Tip: Exclude Transactions in Banking Download
I was asked this week about how to remove transactions from the banking download that had already been reconciled (perhaps they were downloaded twice or entered manually). To remove a transaction, simply click on the check box next to the transaction (in the downloaded transactions section) and a box will come up asking if you want to accept, update or exclude. Excluding it will remove it from the download and put it in the “excluded” transactions tab. If you make a mistake you can go to this tab and undo the transaction.
Books and Resources:
Small Business Tax Facts(Sole Proprietorships/Registered Businesses/Self Employed Workers)
This book helps you take control of your finances by giving you a better understanding of tax (brackets, tax rates, deductions etc), how it applies to your unincorporated small businesses and how to do your own tax return (or at least understand what your accountant does). It also includes a comprehensive breakdown of deductible expenses, by category with special sections on more complex deductions such as home office, vehicle and capital cost allowance.
FastStart Your Corporation(Corporations)
A step by step guide to starting your small business corporation, including what you need to know about incorporation, setting up your accounting and tax considerations.
QuickStart your QuickBooks(Sole Proprietorships and Corporations)
A comprehensive guide that takes you through the many features of QBO and gives you step by step instructions on how to setup and work with QBO day to day. It is ideal for beginners who have never used QBO before and also for those who are currently using it, but have questions or need guidance.
FastStart Your Business (Sole Proprietorships)
A step by step guide for anyone who is planning to start a Canadian business or become self employed (and does not want to incorporate) and wants to know what they need to do or simply has questions.
Small Business and Your Dividends (Corporations)
For incorporated small business owners who want to know more about small business dividends, the differences between salary vs dividends and which is better and step by step instructions on how to file your own dividend declarations (T5s).
Use discount code “special” to save 20% on any (or all) book(s) when you purchase from the website.
Please note that all books on my website are in PDF format.
If you prefer a print version, all books are also available at Amazon . Note that print versions purchased on Amazon include a complimentary PDF - you just need to email me and include proof of purchase.
Free Resources
Business 2023 Tax Deadline Calendar
Starting A Corporation Checklist
Start Your Business Checklist
Dividend Declarations Checklist
Small Business Tax Return Checklist
QBO Set Up Checklist.
Small Business Calculators
Previous newsletters
Consultations
I also provide consultation services where I can answer your specific questions relating to your small business and/or finances, provide clarity and give you guidance. Additional details can be found here and here. Note that I no longer provide ongoing accounting or tax preparation services.
Reviews/Feedback
I would love to hear your comments on my current blog posts, topic ideas for new blogs, book feedback or anything else that you want to talk to me about. You can use my feedback form or email me directly at ronika@montrealfinancial.ca.
For anyone who has purchased my books through Amazon or directly and found them useful, I would be very grateful for a review on Amazon (to leave a review you only need to have an account with Amazon even if you did not purchase the book from there).
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Wishing everyone a great, stress free (at least from tax) weekend.
Ronika