As a small business owner, you’re constantly thinking of ways to save or generate more money, all while addressing the never-ending to-do list that comes with running a business on a daily basis. Although taxes are usually the last item on your mind, they are an important aspect of any successful business operation that may either save or lose you money. While you may already be aware that you can deduct expenses such as rent and office supplies, there are numerous other, less visible tax breaks.
IDM team has put together this comprehensive list to help ensure you never leave any of your hard-earned money on the table.
What are tax deductions?
Tax deductions are a small business owner’s best friend.
An amount that the Canada Revenue Agency (CRA) permits you to deduct from your total taxable income is referred to as a tax deduction. It is possible to move into a lower tax bracket and hence pay less in taxes overall if you are eligible for enough tax deductions.
Because everything adds up, it’s crucial to write off any expense you can, no matter how tiny.
What kinds of expenses qualify as business expenses?
Any money used to operate your firm is regarded as a business expense, and you can deduct it from your taxes. Tax-deductible business costs typically fall into one of three groups:
- Things you use exclusively in operating your business. A landscaper uses sod and mulch to provide landscaping services. A dog training service needs leashes, collars, and treats.
- Things you use exclusively for your business in the space where your business operates. If you rent office space, the utility costs you incur are a business deduction.
- Things you use while doing business. If you use your car to drive to client meetings, you can deduct the round-trip mileage as a business expense.
What are the most common tax deductions for small businesses?
- Start-up costs. Start-up costs for your business can include anything your business needs to launch, from equipment, machinery, and supplies to legal and accounting advice. For a start-up cost to be eligible for a tax deduction, it must arise during the tax year (or fiscal period) your business started.
- Marketing fees. Materials used to market your business and the cost of developing these materials. Examples include business cards, flyers, signage, branded promotional items, trade shows, designer fees, and printing costs.
- Advertising fees. These include the cost of ads on Canadian radio and television stations and in Canadian newspapers. Digital advertising is also tax-deductible, and also the cost of registering your website’s domain name and web hosting.
- Business supplies. The cost of items that your business uses to provide goods or services. For example, grooming supplies used by a hair salon or tools used by a plumbing service.
- Office supplies. Small items such as pencils, pens, stamps, paper clips, and stationery. Even the cost of the cleaning supplies. Don’t include desks, chairs, filing cabinets, and calculators because those are capital items.
- Rent. You can deduct rent paid for property used in your business, including the rent for the land and building where your office is located.
- Home office. Small business owners often burn the midnight oil and work off-hours from home. If this sounds like you, it may translate into a deduction. For example, if your home is 2,000 square meters and your office is 400 square meters, your office is 20% of your home’s total size. That means you can deduct 20% of your home office-related expenses on your tax return.
- Telephone and internet. Telephone, cell phone, cable and internet are all deductible if these expenses are related to business activities.
- Utilities. Expenses for heat, electricity, insurance, maintenance, mortgage interest, and property taxes. For home offices, deductions must be in line with the actual size of the space you’re using for your business.
- Salaries, wages, benefits. Deduct gross salaries and other benefits, such as the Canada Pension Plan (CPP) and Employment Insurance (EI) premiums you pay to employees.
- Independent contractors. If you hire independent contractors or freelancers for any business-related purpose—such as taking product photos for your online store or writing posts for your company blog—this cost is a tax deduction.
- Meals and entertainment. Deduct 50% of the amount that you spend on meals and entertainment. For example, if you take your client to lunch or a hockey game, you can deduct 50% of the cost from your business income.
- Travel. Usually, you can write off 50% of the cost of meals, beverages, and entertainment when you travel on business.
- Delivery and shipping costs. If what you’re mailing or shipping is business-related, you can deduct the cost of postage, envelopes, P.O. Box rental fees, and delivery services like FedEx and UPS.
- Professional fees. Legal, accounting, and bookkeeping fees are all deductible small business expenses.
- Motor vehicle expenses. In addition to claiming round-trip mileage and parking fees on business-related meetings and excursions, you may be able to claim license and registration fees. Other examples include fuel and oil costs, insurance, maintenance and repairs, and leasing costs.
While interest on money borrowed to buy a motor vehicle is a deductible expense, you can’t claim the cost of the vehicle itself as this expense can only be written off over time through Capital Cost Allowance (CCA).
- Accounting and tax prep software. If you’re self-employed or run your own small business, tax preparation software is an eligible deduction.
What are some of the lesser-known expenses your business can write off?
- Business tax, fees, licenses, and yearly dues for commercial or trade organizations. Although these items are deductible, you can’t deduct club membership dues or initiation fees if the main purpose of the club is dining, recreation, or sporting activities.
- Bank charges. management and administration fees, including bank processing fees and the cost of ordering cheques.
- Interest. Incurred on money borrowed for business purposes or to acquire property for business purposes. Check the CRA website for limits.
- Property taxes. For the land and building where your business is located. Property tax related to workspace used for business purposes in your home must be claimed as a business-use-of-home expense.
- Insurance. All ordinary commercial insurance premiums you incur on any buildings, machinery, and equipment you use in your business.
- Bad debt. Think of bad debt as any amount you’re not able to collect from whoever owes you money. You can deduct an account receivable that won’t get paid if you’ve already included it as income for the year. You can also deduct the cost of recovering balances owing to you, such as the cost of a lawyer or collection service.
- Private health services plan premiums. Payments that are made for you or for your employees and their dependents.
What are non-tax-deductible expenses?
- Your labour. When deducting business expenses for repairs and maintenance, you can’t deduct the value of your own labour.
- Fines and penalties. Parking ticket? Speeding ticket? Late fees on your tax return? All of these are non-tax-deductible expenses.
- Commuting costs. While traveling to business meetings or client sites throughout the workday is deductible, traveling to and from your home is not.
- Clothing. Even if you wouldn’t be caught dead in a suit outside business hours, you’re still not permitted to write it off. Ditto for dry cleaning. A few exceptions: if you wear a uniform or special safety clothing.
- Golf club dues and gym memberships. Nice to have, good for your health, and a great way to meet new clients, but unfortunately, not deductible. If the main purpose of your club is dining, recreation or sporting-related, you can’t deduct membership dues or initiation fees.
- Life insurance premiums. Life, health, and disability insurance premiums aren’t tax-deductible for businesses or individuals.
Even if the thought of filing taxes may make a founder cry, this annual task is an opportunity to act in the best interests of your business. Your taxable income will decrease as more expenses are claimed, which can result in significant tax savings.