Please note that none of this advice should be taken as a replacement to a thorough review with a certified professional. This blog is purely from my own personal experiences that I wish to share and your individual situation may be different.
intro
For many who have started their own business or decided to incorporate your consulting business; you may have heard that you can now "write off" things. But what does that really mean? What can I expense and when? And for how much? Are there limits? These are all questions I had as well and I hope I can answer them today.
Running a business is not easy. Your job as the director is to ensure you can satisfy your clients. But on the back end, you also have to run the day to day operations of your business as well. Work does not end at 5pm anymore. Your free time is spent working on growing your brand or business or networking. And to do all that often requires expenses. An expense can be classified as spending in relation to your business that is ordinary and necessary. Ordinary means it must be something that is common of your trade/business. For example, if you are running an online e-commerce business, shipping costs to ship product to your customers may be deductible. Necessary means that the expense incurred must be something that is helpful and appropriate to your business. A good example for any consultant is maintenance on your car-- if it requires an oil change, that is generally a deductible expense as well, as you need a well maintained car to see clients.
Expense management for your business will be one of the most important things you can master. You can earn all the revenue in the world, but if you can not or do not know how to manage your expenses, then you can not be successful. But you might say, hey, isn't that why I contracted an accountant? They will do all that work right? The answer is not always. Sure, an accountant can help you file tax returns and even do monthly bookkeeping for you, but at the end of the day it is your business. The final responsibility still falls back on you, the director, to ensure expenses are properly managed.
The Canada Revenue Agency (CRA) website is a great starting point. As a matter of fact if you read through the entire article, you can pretty much get a good sense of what expenses can be deducted and claimed against your business. However, I will go through some of the most popular expenses and provide real life examples of how it will affect your taxes.
Advertising
This one is quite common still nowadays even in the age of internet. You probably will not be advertising much on the radio and television; but more on the internet. Generally speaking anything related to advertising online, such as hosting a website or running ads you will be able to expense this cost.
There are some rules with claiming the expenses when the advertising is done through a periodical (magazines, newspapers/newsletters).
Business use of home
Many start ups and small businesses operate out of a home. And as long your home is your principal place of business and you use the space to earn business income (such as meeting clients, doing work etc), you may claim the following expenses:
Heat
Home insurance
Electricity
Gas
Water
Cleaning materials
Property taxes
Mortgage interest
Capital cost allowance
Telephone
Rent
The percentage you may deduct is directly related to the percentage of space (square feet) used for business compared to the total space (square feet) of the home. For example, if your space used for business is 500 sqft and your home had a size of 2000 sqft. You may deduct 25% of all of the above as a business expense.
If your home is used for you to live in and do business, you will need to calculate how many hours per day you use the space for business purposes and divide by 24. You then multiply this number by the percentage above to get your total deductible percentage. For example, if you use your office space at home for 50% of the day for business, you will need to multiply 50% with 25% (using the same example above), which then you get 12.5%. Therefore of each of the above expenses you can claim 12.5% as a business expense. If your business operates for part of the week, year, etc, you will also need to adjust your deduction accordingly.
Delivery, shipping
Again as mentioned above, anything related to delivery costs that are incurred related to your business is deductible.
insurance
Insurance includes any commercial policies you may have taken out to cover your building, any machinery or equipment used by your business. This can be claimed as a business expense.
professional fees
Any fees that you incur for your business, such as consultation from legal counsel, contracting an accountant, are all deductible.
vehicle expenses
You may also deduct any reasonable vehicle expenses that are related to your business. I highly recommend that you keep track of your trips in case of an audit. Generally, at minimum, your log book should contain the following:
Date
Destination
Purpose
Number of kilometers driven
After one year of documentation, you also have the option of using a simplified logbook, where you can use the base year to extrapolate your vehicle usage. This only applies if your business usage is similar to the base year.
The following vehicle expenses are generally deductible:
License and registration fees
Fuel
Insurance on vehicle
Interest on loan to purchase vehicle
Maintenance and repair
Leasing costs
Maintenance and upkeep
This one is usually related to your vehicle. But it can also relate to upkeep of your rented space as well. In general, the cost of labour and materials for minor repairs and maintenance is fully deductible. It is to note that if you perform the maintenance yourself, you can only expense the materials, not the labour.
meals
For many small businesses, this one can be a big expense. Food is usually what is mentioned when you think of expenses. Generally meals costs that are incurred during the course of you doing business can be expensed at a rate of 50%. This can include a night out with a client; where you can expense 50% of the entire bill (provided you paid for your client as well).
office expenses
Small items such as pens, paper, stamps etc can be claimed as a normal expense. However, large ticket items such as chairs, desks, computers, laptops and other large electronics are not categorized as office expenses. Instead they are known as capital items-- which is discussed below.
capital items
This is a very broad term and I will not be going over every single rule. I highly recommend before making any large purchase, consult with your tax accountant first to see if it may fall under a capital item.
As a general rule, capital items are items that provide a lasting benefit (like a car). They are usually used to improve a certain condition of the property (such as buying chairs or tables for your office) as opposed to maintaining it (like painting the wall or changing the oil in your car). If the item can be seen as a depreciating asset, it will usually be categorized as a capital item (like a new laptop, which will depreciate over multiple years).
Basically a capital item will be claimed under a capital cost allowance (CCA) which means the expense is claimed over multiple years.
A good tip is to save large purchases to year end (your company fiscal end), as this expense can be deducted for each calendar year. So for example if you buy a chair just before the close of your fiscal year, you can claim part of it for the current year, even though you may have had the chair for only a few weeks. Then next you can claim that chair again, the following year, and so forth until the full cost is deducted.
salary and wages
As your business grows, you may have to hire employees to work for you. You can deduct the following:
Gross salary (including bonuses)
Employer's part of the Canada Pension Plan (CPP) contributions
Employer's part of the Employment insurance (EI) premiums
Worker's Compensation amounts
Travel
Travel that is related to your business to earn income is also deductible. It is to note that any meals will also be limited to 50% of the expense amount.
HST
As a business, you will charge your client taxes (HST is 13% in Ontario currently). If your expenses include HST, you can generally claim 100% of that HST back.
example
Okay great. Now you have a good idea as to what you can expense for your business. And the list is quite long; I have not covered every single area or topic, but instead the most common ones for small business owners. I highly encourage if you to read through the CRA article. Now let's go through sample claim to see how it affects the taxes you pay.
ASSUMPTIONS
Gross business revenue of $200 000 per year
Your business operates in Ontario, Canada in 2018
In both cases your expenses total $38 000
The HST rate is 13%
The above example shows some sample expenses of a business in 1 year. Assuming you spend $38 000 in total expenses (in both scenarios), by simply claiming these expenses on your corporate tax and HST return, you could save $10 640 in taxes!
Conclusion
As you can see, the savings is huge. And this is something that a lot of business owners do not realize early on. Because taxes are not deducted at the onset, these amounts are often due at the end of the fiscal year. As with the rest of the information in this article, I would highly suggest you review these expense management strategies with an experienced corporate tax accountant. They will not only be able to guide you to ensure your expenses are eligible, but they may also be able to give you further tips to save you money at the end of the year.