Finding Small Business Deductions this Tax Season
They say the only sure things in life are death and taxes. While slightly melodramatic, it perfectly sums up how we all feel about this time of the year – taxed. But is your desire to just get “it” done costing you? If you’re more like a fiscal Padawan than a tax Jedi When it comes to finding your small business deductions then this post is for you.
In the eyes of the CRA, a home-based business is no different from any other small business. As long at that business has generated income in that year, there are a plethora of small business deductions you can apply to lower your taxable income.
About Money compiled the most overlooked small business deductions & credits that may be costing you.
Small business deductions for home businesses
If you use your personal vehicle to support your home business there are a host of auto expenses that you can claim to reduce your taxes like fuel, maintenance, and repairs.
According to the CRA, you can deduct regular commercial insurance premiums you incur on any buildings, machinery, and equipment that you use for your business. Home-based business insurance is altogether separate from your personal insurance and is considered commercial in nature so it can be deducted for tax purposes.
If you do business out of your home, then it’s considered your office and you can claim office expenses. These kinds of expenses include office supplies like postage, paper clips, pens, and other similar supplies. However equipment such as computers, printers, and office furniture like filing cabinets, are considered depreciable assets, not supplies. These kinds of assets amortize over time but you can still claim a portion of these kinds of expenses under the rules of Capital Cost Allowance.
Mortgage Interest, Property Taxes, and Rent
You can deduct the cost of the space you use to run your business; this is proportional to the amount of space designated specifically to your operations. If you have a mortgage, you can deduct a portion of your interest. If you own your home outright, you can deduct a portion of your property taxes. If you rent, then a portion of your rent can be deducted as long as the space is your principle place of business or you use the space for the unique purpose of earning business income and it’s used on an ongoing basis to conduct business with your clients.
Other home expenses that can be deducted proportionally based on the amount of space used to run your business:
- Utilities like heat, electricity, and water
- Telephone & Internet
- Cleaning supplies
Remember, you will need to keep all sales invoices relating to any expenses claimed.
Carry Forward of Unused Work Space Expenses
The above expenses can only be used against business income generated. They can’t be used to create or expand a current business loss so if you’re expenses are greater than your income; you can carry them forward to offset income in future years.
Investment Tax Credits
Apprenticeship Job Creation Tax Credit
Does your small business hire tradespeople? If so, you can get an Investment Tax Credit of up to $2,000 for hiring an apprentice who’s in the first 2 years of their apprenticeship program for trades listed as a Red Seal Trade. This is called the Apprenticeship Job Creation Tax Credit and it’s a nifty way to get a tax credit while also taking advantage of skilled labour at a reduced rate.
Scientific Research & Experimental Development Tax Credits
You don’t need to be a giant corporation (or even incorporated period) to take advantage of SR & ED tax credits. Small businesses can qualify for these credits too and if you happen to be eligible for but not taking advantage of this credit – you’re leaving money on the table. Work that qualifies for SR & ED credits is outlined by the CRA on their website, along with a handy list of examples of what doesn’t qualify. The best part of the SR & ED tax credit is that it’s refundable, so even if you didn’t make a profit you will still be eligible to receive the refund back in cash. Check out About Money’s step-by-step guide on how to file an SR&ED claim for more information.
Investment tax credit for childcare spaces
If your business does not involve childcare services but actively creates childcare spaces in existing licensed facilities specializing in childcare, then you can claim a non-refundable investment tax credit to the tune of $10,000 per child care space created or 25% of the eligible expenditure per child space you helped created. Eligible expenditures include the facility’s building, any furniture, appliances, playground structures and equipment. Ongoing expenses, including supplies, utilities, and salaries are not considered eligible expenditures.
Allowable Reserves as an Income Tax Deduction
If you have a reserve, contingency account, or a sinking fund set up to cushion yourself from surprise expenditures you can use it as a deduction as long as the amount is deemed reasonable by the CRA. This isn’t a free pass though; the reserve will have to be returned to your income the following year. If you used the reserve on business expense, then it ends up being deductible in most cases anyways which is why reserves are best used for planned expenditures. For tips on how to be prepared for unplanned expenses check out our post on how financing can help with cash flow management. For more details on reserves refer IT-154R on CRA’s website.
Small business deductions for Private Health Plan Premiums
If you’ve paid to insure yourself or any member of your family then those premiums from any Private Health Services Plan (PHSP) are tax deductible. In order to be eligible for these deductions your net income from being a self-employed small business owner must exceed 50% of your total income and you must be actively engaged in your business on a consistent and continuous basis. Refer to the CRA’s Business and Professional Income Guide for more details on how to determine if you qualify for this tax deduction.
Small business deductions for hiring your spouse or child
Anytime you hire a new employee, their salary or wages are deductible as a business expense, this also holds true if you hire your spouse or child. The added benefit in this scenario is that you can take advantage of income splitting. This enables you to drop your own personal net income into a lower tax bracket affording you some tidy tax savings. Learn the ins and outs of income splitting by reading About Money’s article on the topic: Pay Less Canadian Income Tax with Income Splitting.
Other types of eligible expenses that can act as tax deductions
The CRA allows any reasonable business expense to be deducted. A reasonable expense is an expenditure that is appropriate to your business that was undertaken in an attempt to drive profits.
3 important things to keep in mind when evaluating expenses as potential small business deductions:
They must be reasonable: keep in mind what may be reasonable for one business is not necessarily reasonable for another. If you’re unsure, call the CRA or ask an accountant.
*Pro-tip: When contacting the CRA about a business account, use email so you have a written backup of their advice*
Only the portion of the expense that is directly related to your business is eligible for deduction: let’s say for example, you use your vehicle for both personal and business activities. Only the portion of the expenses incurred while doing business is eligible for deduction.
You must be able to supply back-up documentation for each expense: receipts or any back up documentation detailing the expenditure is a must so keep those records organized.
Common small business deductions:
- Accounting and legal fees
- Advertising expenses
- Automobile expenses
- Bad debts
- Bank charges
- Conference and convention expenses
- Consultant fees
- Interest on money borrowed for your business
- Insurance for buildings, machinery, or equipment
- ISP fees
- Membership dues for business-related organizations
- Meals & entertainment expenses
- Office rent
- Office supplies, postage and courier expenses
- Promotion expenses
- Property taxes
- Travel expenses
Some of the deductions listed here are fairly straightforward while others, like the SR & ED tax credits and the Capital Cost Allowance can be a little trickier to calculate. You can contact the CRA with any question or simply hire an accountant, the expense will be well worth maximizing your deductions and any fees incurred can act as a deduction for next year’s filing. If your cash flow isn’t robust enough to support this kind of expense on short notice, there are a number of small business financing options that can get you through tax season until you can get your hands on your refund.