It’s tax season and that means it’s time to pull out those receipts and organize your numbers for your small business. Having worked as a tax preparer in the past, I know how confusing it can be to file business taxes. Although I no longer prepare tax returns for anyone other than myself, I thought I’d share a few tips from things I’ve observed or been asked over the years. This is NOT professional advice. Everything written here is subject to change. Please seek out a tax preparer or accountant for professional advice.
1 – Organize expenses by category, not month
Head to the Canada Revenue Agency (CRA) website and download Form T2125. I highly recommend reviewing this entire form. If a tax preparer is doing taxes for you, this form will show you what kind of information they need.
Scroll to Part 4. This is where your business expenses get entered. As you can see, the form needs expense amounts entered by category, not month. Don’t hand your tax preparer an overall monthly amount for expenses. Give them a summary broken into these categories.
2 – You can claim a portion of home expenses if you work from home
If you use part of your home for business, like having a home office or production area, you can claim a portion of your business-use-of-home expenses such as heat, electricity, mortgage interest, insurance, and property taxes. See Part 7 of Form2125. In order to claim these amounts you must met one of the following criteria:
(1) the home needs to be your principal place of business, or
(2) you must use that space only to earn business income and you use it regularly to meet clients.
The main thing I want to emphasize here is that it’s important to have your hydro bills, property tax receipt, etc., if you want to claim these expenses.
You will also need to know what percentage of your home is used by the business. For example, if you have 10 rooms in your home, and 1 of those rooms is a home office only used for your business, the percentage of business use is 1/10 or 10%.
3 – Don’t forget GST/HST
If your business makes over $30,000, you need to collect and remit GST/HST. I won’t get into the details of this. For more information you can check out this page. What’s important to for tax time is that you’ll need to know (1) your total gross sales, including the GST/HST you collected, (2) the amount of GST/HST collected, and (3) the amount of GST/HST you paid out on your expenses.
4 – Know the difference between a Capital Cost and a Current Expense
Not every expense is the same. According to the CRA, current or operating expenses are recurring expenses that provide a short-term benefit. Capital costs, on the other hand, provide a benefit that usually lasts for several years. This deduction is claimed over a period of years as a capital cost allowance (CCA).
Confused? Don’t worry, it’s not always black and white. I’ve seen different tax preparers classify expenses differently. I recommend looking at the classes of depreciable property to see if your expense falls under one of the CCA classes. In general, something like a computer, or office furniture, items which should last your business for several years, would be considered a capital cost.
5 – Don’t write your income down to zero
This tip comes from my time working for a mortgage agent. We’d often have business owners looking to arrange a mortgage, only to provide us with tax returns for the last two years that showed their income as $1,000, or $3,000 for each year. Lenders will not give you a mortgage with that kind of income. It doesn’t matter if your business grossed $60,000. The net income you show on your taxes is what counts.
Of course, no one wants to pay more tax than they have to. That’s why business owners find every expense they can and write their income down to nothing. I get it.
However, if you’re considering moving or refinancing your mortgage in the coming years, I encourage you to reach out to a mortgage professional to see what minimum income you need to report in order to qualify for a mortgage.
The final word on taxes
I highly recommend using an accountant or tax preparer to prepare your tax return. It just makes life easier for you. That said, you still need to educate yourself about what information is needed. It’ll help you make better business decisions, as well as keep better records.
If you choose to do your own taxes, make sure the CRA website is where you go for answers. Everything you need to know is there, even if it takes a couple searches to find it.
