When owning a small business, it is important to know what can and can’t be claimed on your taxes as a business expense. While often the thin line can be blurred between personal expenses and business expenses, a false claim can cost you money and even bring an alarming auditor to your door. Let’s take a look at what can be expensed, and how to claim a business expense properly.
Business Operating Expenses
The first and foremost thing to examine in your tax claims is the cost of operating your business. From client meetings and delivery vehicles to fuel and even repairs, these are all factors that are required to run your business and can all be claimed on your taxes. However, these claims are adjustable in terms of how much use was directly linked to your business in relation to your personal activities. For example, a higher percentage of a work vehicle can be claimed if it is used solely for business purposes, however if you use it as your personal transportation as well, your claimable amount will drop accordingly based on the number of kilometers used for each. Typically, the percentage of claimable amounts are firstly determined by whether your business is a corporation or sole proprietorship, a tricky division, which your accountant can happily determine and explain to you. Additionally, lawyers’ and accountants fees can also be considered part of doing business, so you can in fact claim these as a business expense as well.
Home Office & Office Expenses
Often small businesses are run from your home, which means you can claim expenses based on this location. However, there is a line drawn in terms of what is considered a “home office”. Typically, the CRA will allow the classification of a home office to be a main place of business or a space used solely for the purpose of earning an income within your primary residence. To calculate the exact cost it takes to run this space, there is some simple math involved. Find out the entire square footage of your work space, and calculate what percentage of your home it occupies. That result can be used to determine the exact percentage of costs associated with your home office, such as mortgage interest or rent, property taxes, utilities and home insurance which can then be claimed as a business expense. Additionally, office expenses such as stationary, pens, etc. can also all be claimed as long as they are used for business purposes.
Basically, capital property is any big ticket item that can benefit your business long-term. This can include computers, software, vehicles, furniture, equipment or even buildings. While you can’t always claim the purchase amount entirely in the tax year it was purchased, you can claim a percentage of the cost over a few tax years depending on the item. This is referred to as capital cost allowance. The value and depreciation amount are calculated with a log kept by the CRA, each item with their own CCA (capital cost allowance) class. As mentioned previously, the percentage of claimable amount is adjusted by depending on whether or not your business is considered a corporation or sole proprietorship. Always be sure to ask your accountant which category your business falls into, in order to have a better understanding of the amount you can claim on each item in question.
Miscellaneous Business Expenses
Not everything you may need to run your business falls into an aforementioned category. This is why we have the miscellaneous category. Things such as advertising is also considered a business expense. Marketing via newspaper, television and radio can actually be fully deducted, however magazine advertising may be dependent on the publication content. This is a prime example of something an accountant can assist with determining and calculating to ensure what you file as a tax claim is allowable and isn't wandering into any gray areas.
Also, things such as employee salaries, bank charges and interest, employer pension contributions and even employment insurance may all be permitted as a business expense claim. However, be mindful that proof and reasonability is often required in order to obtain the maximum amount of deduction on your claims.
Tax season, bookkeeping and payroll can all be very overwhelming, especially for small business owners running the business all day long by themselves. It is important to know and understand what you can claim and how to do it properly and legally. Determining the percentages and amounts your business is permitted to claim is based on many underlying factors, all of which an accountant can assist in explaining. If you have any questions about filing your income tax returns for your sole proprietorship or corporation, business expenses and what is allowable to be claimed, give Cal Accounting a call at 705-728-6469. We are always here to help and are dedicated to ensuring your taxes are kept orderly and accurately while keeping as much in your pocket as possible.