One of the things all business owners should do is claim every available dollar they can, legally, when doing their taxes. Here's a quick guide to some of the things you should know before submitting your tax return this year.
First, what is a business expense? Sounds simple, doesn't it? But, all too often business owners submit expenses that are not allowable and don't submit some they could legitimately claim. As a general rule, any expense you incur for the sole purpose of earning business income is allowable.
However, you can't just say you incurred an expense, you have to provide proof by submitting a receipt, invoice, agreement of purchase or something else that proves you incurred the cost. Usually a line on your credit card statement or bank statement is not sufficient. All documents should show the vendor's name, contact information, date and their tax numbers.
If you receive cancelled cheques from your bank either hard copy or electronically, keep them - these are proof you paid for what you say you purchased.
The following list is shown courtesy of Canada Revenue Agency (CRA). If you visit the CRA website you can access a breakdown of each of these items.
- Prepaid expenses
- Accounting and legal fees
- Advertising expenses
- Business tax, fees, licenses and dues
- Insurance expenses
- Interest and bank charges
- Maintenance and repairs
- Meals and entertainment
- Office expenses
- Salaries, including employer's contributions
- Business start-up costs
- Motor vehicle expenses
Two expenses that often trip people up are meals and entertainment and motor vehicle expenses, so we'll briefly mention them here.
Meals and Entertainment
The maximum percentage you can claim for food, beverages, and entertainment expenses is 50 percent of either the amount you incur or an amount that is reasonable in the circumstances, whichever is less. There are some exceptions in specific circumstances, so visit CRA for more information about events such as conferences.
Motor Vehicle Expenses
If you use a motor vehicle for both business and personal use, you can deduct only the portion of the expenses that relates to earning business income. However, you can deduct the full amount of parking fees related to your business activities and supplementary business insurance for your motor vehicles.
Running a business from your home
People often get confused as to what they claim when working from home. The key is that you have to meet one of the following two conditions if you plan to deduct home expenses; first it has to be your main place of business, or two you use the space in your home only to earn income for your business and to meet clients.
If you meet one of those two criteria you can deduct a percentage of your maintenance costs, such as heating, home insurance, electricity, and cleaning materials. The percentage has to be reasonable; usually this is based on the percentage of space in the house you are using.
If you hold inventory (either finished products, raw materials, packaging materials, supplies, work-in-progress etc.) you will need to carry out an annual inventory to calculate the cost of goods sold and net income. There are a bunch of rules appertaining to this so either ask your accountant for more information or visit the CRA website.
One major question people ask, is how to value the inventory. This is done by determining its fair market value (either the price you'd pay to replace it, or the amount you would get if you sold it). Or, the value of individual items, that is their fair market value or their cost, whichever is lower.
One word of caution, once you decide on a method you will have to use that same method in future years.
The above is meant as a rough guide only. For definite information please visit the Canada Revenue Agency (CRA) website (www.cra-arc.gc.ca) and/or retain the services of a qualified accountant.