December 31, 2021

Tax Deduction for Small Businesses

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Tax Deductions

Tax season is approaching once again in Canada, meaning, it is time to gather up your piling receipts, contact one of our accountants at Ebrahimi Accounting, and beautifully turn your annual numbers into shape. Although many small business owners see tax season as a complicated and stressful time, if done properly, can be seen as an advantageous season that can help your business, its expenses, and taxes. There are many tax credits and deductions available for small business owners in Canada to claim, helping decrease business taxable income and tax payables.

Home Office Expenses

A wide range of businesses conduct business from the comfort of their home, and after Covid-19, operating a business and working from home is becoming more and more common. The good news is the Canada Revenue Agency (CRA) allows you to deduct expenses relating to your home, and home office – if you meet one of the following two conditions:

  • You use your home more than 50% of the time when you work
  • Your home is exclusively used to conduct business and you regularly hold meetings

Although you are not eligible to entirely write off your mortgage or rent, you’ll still be able to get deductions on partial amounts. Firstly, you need to establish the square footage of your home workspace and calculate the percentage used for your work from the total. For example, if your home is 1100 sq. ft. and your office is 286 sq. ft. you will be able to deduct 25% of your home-related expenses from your small business income. This comprises household expenses such as:

  • Mortgage/Rent
  • Property Taxes
  • Home/Condo Insurance
  • Strata/Maintenance fees

However, if you rent an office space simultaneously, you won't be able to deduct these home expenses, even if you are still using your home office and conducting business at home.

Accounting and Legal Expenses

Expenses related to your business accounting or legal matters in the regular course of operations can be claimed on the income tax return to lower the tax obligated to pay.

Insurance Expenses

Although subject to only qualifying insurance types, small business owners can write-off premiums paid for these insurances. Insurance categories include General Business Liability Insurance, Business Property Insurance, Business Interruption Insurance, and Life Insurance.

You can be eligible to fully claim General Business Liability Insurance used to protect a business from plausible lawsuits relating to injuries. Business Property Insurance to preserve business assets, including the destruction of equipment and buildings. Similarly to Business Property Insurance, Business Interruption Insurance is used as to protect assets, particularly losses incurred from natural disasters. Life Insurance can only be partially claimed, generally used if the small business owner’s life insurance policy is used as collateral on a business loan.

Vehicle Expenses

Vehicle expenses are one of the most common business expenses, it is also eligible to be claimed by small business owners. The CRA allows business owners to claim a reasonable portion of their vehicle expenses back as a tax deduction. These expenses include:

  • Fuel
  • Repairs/Maintenance
  • Insurance
  • License and Registration
  • Depreciation
  • Toll charges

On Average, small businesses write off 50% of vehicle expenses, so, there is plenty of flexibility depending on your circumstances. Make sure to track your expenses, and the travelling distance used to conduct your business for you to backup as you claim these expenses.

Personal Expenses

It is important to note that you can only claim certain personal expenses that is relating to your business operation. The most common examples of claimable personal expenses are:

  • Home Phone Bill
  • Home Internet Bill
  • Cell Phone Bill
  • Supplies
  • Software Licenses
  • Small Tools
  • Travel
  • Meals and Entertainment

Salaries and Wages

Salaries and wages paid to employees can be beneficial not only to show how well your business is doing but also can be used to significantly help for deducting and reducing taxes during the respective tax year.

Other Eligible Expenses for Deductions

Below is a list of other deductions relating to your business that you may be eligible for as a business owner:

  • travel expenses
  • rent expenses
  • meals and entertainment
  • Interest and bank charges
  • depreciation expenses
  • advertising expenses
  • 50% of meals and entertainment
  • donations

Financial Statements can help provide an accurate report of a business's overall financials to help make better business decisions. Not only it is used to track the financial spending of your business or financial health, but it can also be used when preparing your business tax returns. It is important to contact one of our professional accountants at Ebrahimi Accounting to help you determine the various tax credits and deductions that are available to you as a small business owner.

Note to reader:

Please note that the information presented in this article is to help provide you with general information. This article does not take into account your personal circumstances and should not be utilized without first speaking with an accounting professional. Ebrahimi Accounting will not be liable for any issues that may arise from using the information presented within this article. Please contact Ebrahimi Accounting for more Info.