Three things small business owners can do to maximize deductions.
You’re approaching the end of the fiscal year, and as a small business owner that means you can finally take a deep breath, or maybe even a well-deserved vacation in Bora Bora to get your tan on. But before you begin sipping that ginger ale in economy class (we said well deserved, we didn’t say it was all-expenses-paid!), we’re here to remind you of three things that you should do this month to prepare for the upcoming tax season.
1. Small business means big deductions.
We get that as a small business owner you may be looking for ways to be efficient with your spending and save money where you can. And while saving money is always a good idea, when it comes to taxes, choosing to spend now can actually be beneficial later.
Taking advantage of holiday sales to upgrade any major office equipment, such as a photocopier, is especially a good idea as a photocopier is considered a capital asset (meaning it’s an asset that will benefit you over time) and qualifies for claiming the capital cost allowance. Here’s how it works: the Canada Revenue Agency understands that office equipment such as furniture, computers, a photocopier – you get the idea – wears out or becomes obsolete over time (remember fax machines?), so they allow you to deduct the cost of these items.
The federal Fall Economic Statement included a temporary change to the half-year rule for claiming CCA, which will have an impact on Canadian business owners. The change takes effect for purchases of depreciable equipment (such as computers or furniture) made on or after November 21, 2018 and before 2024 and will affect the amount that may be claimed on the 2018 tax return. The new measure, referred to as the “Accelerated Investment Incentive,” allows for 150 per cent of the normal CCA rate to be claimed. The amount of CCA that could be claimed in the year of purchase was previously 50 per cent meaning the amount that can be claimed has tripled.
While we’re on the topic of expenses, ensure you’re maximizing your deductions by collecting the receipts for all business-related purchases and make sure you’re keeping track of them whatever way works best for you – whether that’s in an app or good old fashioned filing cabinet, so you’ll be ready come tax time. Trust us, you’ll be thanking yourself later.
2. Have you ever thought skipping your bonus could get you more money?
On the flip side of crossing expenses off your list before the end of your fiscal year, have you considered delaying or deferring your personal income? As a business owner, it’s always a good idea to take a close look at your personal income before the end of the calendar year and think about whether you would pay more taxes on that income this year, or the next. For example, when you’re writing those end-of-year bonus checks for your employees, perhaps writing one for yourself may bring you to a new personal tax bracket this year, meaning you’ll be paying more taxes.
Deferring income may not be the best decision for every small business owner. If it looks like you might make more money next year than this year then deferring that income is likely not the best route to take, as you’ll end up paying more tax next year. If you have questions about deferring income it’s best to speak to a tax expert, who can provide guidance on right choice for you.
3. Claiming the deductions that come with #bosslife.
During those moments when you’re not out there hustlin’, make sure you’re claiming – or preparing to claim – the unique tax credits and deductions that come with being self-employed. We’ve outlined some of the most commonly missed (or misunderstood) opportunities for small business owners below.
If you have a home office, you can claim this on your tax return – as long as your office is your principal place of business or used for meetings on a regular basis. All you need to do is determine the portion of home your office spaces take and then you can deduct that portion of your rent or mortgage, home insurance, repairs (as long as they’re to your home office, renovations to your kitchen don’t apply) and other related costs. For example, if your home office takes up 10 percent of the square footage of your home, you may be able to claim 10 percent of utilities, insurance, property tax and mortgage interest.
You can also deduct any vehicle expenses that you incur – as long as they’re for business purposes. If you’re also using your vehicle for personal use then calculating what can be claimed can get complicated, but we’ve got some pointers. You’ll need to keep a well-logged account of the business use of your vehicle as well as the overall expenses for the vehicle throughout the year. To calculate what can be claimed come tax time, you’ll need to multiply the total amount of expenses by the percentage you used the vehicle for business. So, let’s say you drove 20,000km throughout the year and 6,000km of that was for your business, you can deduct 30% of your vehicle expenses for the year.
Lastly, many business owners may be aware that business meals and entertainment expenses (such as taking clients to the baseball game) are deductible at 50% of the amount paid, but what business owners may not realize that if you host an event and your whole staff is invited (such as a holiday party) the whole cost is fully deductible. Party time, excellent!
We’re so dedicated to ensuring business owners get what’s theirs that we’ve made a small business checklist to help you determine what you need when it comes time to file.
With these three things checked off your list, you’re now ready to experience Bora Bora without the stress of being unprepared for the upcoming tax season.
If you still have questions before the new calendar or fiscal year, a Small Business Tax Expert at H&R Block can answer any tax questions you may have. We’re open all year round. Find an Small Business Tax Expert near you.