Home Business Taxes - Make it Easy on Yourself
Many home business owners over-pay their home business taxes due to lack of knowledge, a conservative nature, or bad advice. If you're one of them IT'S TIME TO STOP!
You have a LEGAL RIGHT to claim your maximum home business tax deductions.
To determine your legitimate deductions, you need professional guidance and advice. I recommend finding someone who adopts an aggressive approach to planning, enjoys the professional and intellectual challenges of knowing the “fine line”, and can bring you comfortably close to it without going over. (No chartered accountant (CA) or certified general accountant (CGA) would risk their reputation or livelihood by advising you to go over that line.)
In the meantime, I have put together a thumbnail sketch of how running your home business may positively affect your tax calculation.
For your home business to qualify for deducting business expenses related to using a work space in your home, it must be your "principal place of business" or you must "use the space only to earn your business income, and you use it on a regular and ongoing basis to meet your clients, customers, or patients".
If your home business qualifies under the above requirements, you'll want to be sure you're taking advantage of the tax savings you're entitled to.
Consider the following when filing you home business taxes:
1. Have you deducted an appropriate portion of all of your home maintenance costs?
These include (but aren’t limited to):
o utilities such as heat, water and electricity
o the cost of cleaning materials
o general repairs
o insurance (home business insurance premiums are 100% deductible)
How much can you claim as a home business tax deduction? The Canada Revenue Agency advises taxpayers to "use a reasonablebasis" to calculate the appropriate portion of home business expenses to claim. (Their formula suggests you prorate the area of the work space by the total size of your home. For example, if you have a 2000 square foot home and your homebusiness occupies 500 square feet, you would claim 25% of your maintenance costs for your business.)
2. If you own your home, have you deducted expenses (mortgage payments and property tax) related to home ownership?
The Canada Revenue Agency forms T2124 and Form T2032 each contain a chart called "Calculation of business-use-of-home expenses" that will help you figure out your allowable claim for home business income tax deductions. (Keep in mind thatyou can't deduct an amount that's greater than your business' net income for the year, but any remainder can be carried forward to reduce future tax liability.)
One thing to note is that you can only claim your business 'use-of-home expenses' against your business income when calculating your home business taxes....so if you've got $1000 worth of business-related home expenses, but your business only earned $500 for the year, then you can only claim a maximum of $500 on your taxes. However, the remaining $500 not claimed can be carried forward to future years to reduce your taxable income down the road.
Note: If you rent, you may also qualify to deduct a portion of your rent payments towards your home business taxes.
3. Operating expenses
You can claim business telephone and Internet expenses,
4. What about your Vehicle?
If you have a single car and use it for business 50% of the time, you can claim half of your car-related expenses (gas, oil, maintenance, insurance, interest on car payments). Keep a mileage log to support your business usage claim.
If you have two cars and use one exclusively for business, you can claim 100% of that car’s expenses. Be sure to claim depreciation of 30% on your car each year from income. Also, make sure you have appropriate business insurance coveragefor your car - the additional premium is 100% deductible.
5. Have you taken your office furniture and equipment into consideration?
Office furniture, computers, software, and peripherals like your printers, fax machine, etc. should be depreciated over time using the capital cost allowance (CCA) formula, which lets you deduct a portion (20% to 100%) each year.
6. Do you pay salaries to children, spouse, relatives or others to perform work for your business?
These payments are all deductible expenses, but keep payments reasonable and properly structured to avoid problems in the event of an audit.
7. Do you entertain or pay for meals for your business customers and clients?
You can only deduct 50% of qualifying meals (including alcohol, taxes and gratuity) relating to promotion or other "eligible purposes". Eligible purposes include taking a current of prospective customer out for breakfast, lunch or dinner as well as entertaining someone who is knowledgeable in your industry - someone who can benefit your business with their opinion or expertise. If you attend a trade show, you can claim 50% of the cost of your meal.
8. Have you incurred education (i.e., business development education costs) related to your business?
If you attend a seminar, conference, convention or trade show relating to your business interest or operation, be sure to keep all your receipts - your expenses are 100% deductible. (Don’t forget to include any parking costs.) Business related magazine and newspaper subscription costs are tax deductible.
9. Other expenses to track for taxes are:
o Advertising and promotion costs
o Bank fees and charges
o Business taxes and licensing
o Business loan interest
o Business-related travel expenses
o Membership dues (for business and professional organizations)
o Office supplies (ink cartridges, pens, pencils, etc.)
o Postage and courier costs
In closing, remember that it's not just what you earn, it's what you KEEP that really counts.
Meet Laura 'Lake' Kenway - Home Biz Tax Expert
Lake says, "Canada, you know tax planning doesn't happen when you file your tax return ... It happens every day throughout the year ... doing all the little things you can to legally reduce your net taxable income because YOU took the time to learn and know the rules."
Lake knows that you don't have time to spend looking for Canadian bookkeeping and tax information that may affect your business, so she goes hunting to find it for you to ensure you have it at your finger tips ... when you need it.
If you need information or assistance with:
1. Tax compliance as it relates to Canadian bookkeeping
2. Canadian sales taxes
3. Small business income tax return reporting which is different than financial statement reporting
4. Owner managed corporate tax issues.....
....or anything about the financial health of your small business, I highly recommend checking this site out:
Meet Laura Kenway, Canadian Small Biz Tax Expert
And here's a guide that I've found to be really useful....I hope you find it helpful too.
Liberty Tax Service in Canada
Learn more about managine your business. Go from 'Home Business Taxes' to 'Home Business Management'