Updated: Dec 25, 2022
Now that we are nearing the end of 2021 and tax season is just around the corner - did you know tax is one of the biggest "expenses" for profitable businesses?
As a business owner, taxes can seem complicated and scary. It may be frustrating if you need to foot a big tax bill but you don't understand how it was calculated, especially if you didn't take all the applicable write-offs that are available to you and your business.
Today, I will go over TOP business tax deductions so that you can maximize your deductions and reduce your tax liability, so you can better plan for the upcoming tax season.
In Canada, you may be operating a business as mainly a sole proprietor or a corporation. If you are a sole proprietor, you are taxed based on the individual tax rates, which range from 20% to over 50% for combined federal and BC rates here in Canada.
If you are incorporated, the combined federal and BC corporate rate is 27% OR if you are eligible as a Canadian-Controlled Private Corporation (CCPC for short), you can apply a reduced combined rate of 11% on the first $500,000 of taxable income.
Keeping these tax rates in mind, let's jump into some ways to MINIMIZE TAXES so that you can INVEST more back into your business.
Tax Write off #1: ONLINE tools and platforms
Given the direction the current world is going with the Pandemic, a lot of businesses started or have been forced to operate online to some extent. With that comes many expenses related to online tools and platforms that were used to operate your business.
For example, you may have organized online meetings on Zoom, needed file storage with Google Drive, edited documents with Adobe, and incurred domain and transactions fees for your website on Wix. The use of all these platforms cost money, which can be used as tax deductions for your business.
If you operated online businesses on Shopify, Amazon, Etsy, and/or Ebay, you will have also incurred monthly ecommerce fees as well as countless transactions fees, which are all tax deductible expenses.
Tax Write off #2: Capital Property
Let's get into the fun stuff! You may purchase certain assets such as a cellphone, camera, computer, office furniture, and even a car for business purposes.
For expenses that are not "current" but capital in nature, CRA defines these costs as "giving a lasting benefit or advantage" - so these costs cannot be deducted fully right away. Instead, these capital costs are determined to be depeciable property, and you can take depreciation expense (also known as capital cost allowance or CCA).
These assets are categorized into certain CCA classes [as shown here] and depreciated based on the applicable rate. For example, Class 8 fits most general properties, such as furniture, appliances, and tools costing more than $500 each and have a CCA rate of 20%.
There is currencly an Acclerated Investment Incentive measure in place where eligible property acquired before 2028 can depreciate 1.5x the CCA rate!
For vehicles, there is often a debate as to whether to purchase vs. lease. It really depends on your circumstances, such as how often you use your vehicle for business purposes (since personal use is not deductible) and the nature of your business.
Interestingly, CRA has expanded their support for Business Investment in zero-emission vehicles (ZEV). That means that if you need a car for your business and estimate an upcoming large tax liability, purchasing a ZEV would allow you a depreciation expense of 100% of the purchase cost, up to $55k. This is a big jump from normal vehicles that limit only $30k with a depreciation rate of 30%.
Tax Write off #3: Product Costs
If you sell physical products, any costs incurred related to product samples, packaging, transaction fees, postage & shipping are all tax deductible. If you purchased tools to create products, tools that have a "lasting benefit" need to be capitalized and taken depreciation as mentioned previously.
If you incurred research & development (R&D) costs for your product, there needs to be an assessment as to where the expenses are deductible in the year or need to be capitalized and depreciated.
There are also tax incentives for Scientifc Research and Experimental Development Tax Incentive Program (SR&ED), which encourages R&D to be performed in Canada and in which you can benefit in various ways such as an income tax deduction, an investment tax credit, and even cash refunds if eligibe.
Inventory is entirely different topic on its own and may or may not be complicated to calculate based on the type of product you sell. Though in summary, you can value your inventory at the lower of cost or fair market value.
Your inventory valuation determines the cost of goods sold, which is used to calculate gross profit (ie. sales - cogs). This is extremely important to determine how much you are profiting from the sale of each product. Inventory can be various things, such as
physical goods for sale
work in progress for a professionial practices such as an accountant, dentist, lawyer, medical doctor, etc,
crypto that has been mined
Tax Write off #4: Home Office Expenses
If you pay rent for an office, that is tax deductible expense. How about your home office related costs?
You can write off the costs related to the portion of your home when it is either your
(i) principal place of business or
(ii) you use the space only to earn business income, and you use it on a regular and ongoing basis to meet your clients or customers.
Deductions you can take for your home office expenses as a sole proprietor are:
Maintenance cost (ie. heating, home insurance, electricity, and cleaning materials)
Property taxes, mortgage interest, and depreciation (aka capital cost allowance or CCA)
if you don't own your home, rent and any expenses incurred related to the workspace
You can calculate your home office expense by taking the area of the workspace divided by the total area of your home. In addition, if you use the part of your home for both business and personal living, you would need to calculate how many hours in the day you use the rooms for business and divide it by 24 hours.
For example, if you use a room in your home exclusively for business and it is 25% of the total size of your home, you can deduct 25% of all home related expenses as part of your home office expense.
The above example mainly relates to sole proprietors but there can be tax planning done to deduct such expenses as a corporation.
Tax Write off #5: Miscellaneous Operating Expenses
Here are a few more operating expenses that may slip your mind as a small business owner, aside from the typical expenses we all know we can deduct, such as office supplies, salary, expense, as well as accounting, tax, and legal costs.
The first expense that has become quite popular in the past few years are online marketing expenses. You may be advertising on Google, Facebook, TikTok, Youtube, and/or Influencer ads - these costs are all deductible when incurred to promote your business' product or service.
Another type of costs that are becoming more common through use of Upwork and Fivver are the use of freelancers and contractors for one off tasks or projects.
If you incurred costs related to a Virtual Assistant, Graphic Designer, Photography services, Video Editor, Website Creator, Copywriter, etc - it may be common to pay in cash via bank transfer without leaving a paper trail.
Make sure to always collect supporting documentation when it comes to employing contractors so that you can deduct these expenses related to your business.
If you need to travel for business purposes, than costs related to travel such as air, bus, train, vehicle, as well as accomodation expenses such as hotels and airbnb are tax deductible.
If you lump in a business related and personal trip into one, you may only deduct the business portion of the trip and only if the primary purpose of the trip was for business purposes (not a week long vacation with one hour of business).
For example, if you attended a three day business conference in Mexico, but you also decided to stay an additional two days as vacation, only costs related to three days of hotels, transportation, meals (subject to 50%) for the business conference is deductible from your business income.
However, the airfare to and from Mexico can be fully deducitble, as long as the primary reason for going to Mexico was for busienss (not for vacation), and the cost of airfare is comparable to the airfare cost you would have incurred if you had only booked for the three day conference trip to Mexico.
Meals & Entertainment (M&E)
Costs to treat your clients or potential clients out for dinner or to entertain them are also tax deductible, but there is a limit of 50% of costs.
This is the main difference between accounting and tax, since your financial statements may deduct the full amount, but tax only allows you to deduct half. Costs related to meals are food and beverages, including taxes and tips, and the limitation applies to meal expenses incurred during travel as well.
There are a few exemptions such as if you throw an office party and invite all your employees (such as an annual Christmas party), then the M&E expense is fully deductible up to 6 events per year.
As for entertainment, it is defined as "amusement and recreation" such as costs of tickets for a theatre, concert or other performance, cost of private boxes at sports facilities, cost of a cruise, admission to a fashion show, night clubs, etc.
The general rule of thumb is if it was incurred to earn business income, than it is tax deductible. Of course, the expenses must be reasonable and any personal use is not deductible. It's also important to have supporting documentation, such as receipts, in case you get audited by the CRA.
Disclaimer: Note this post is not accounting nor tax advice and should be used for entertainment purposes only. Consult with your own accountant and/or tax advisor for specific advice related to your business situation and needs.
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