If there’s anything that irks business owners, it’s paying the government more tax than they need to — and rightfully so! What I am going to discuss here is some commonly missed small business tax deductions that may not have even occurred to you — and why you should be thinking bigger than writing off a few expenses here and there.
Here’s a story I get a lot. “My friend told me that their accountant lets them deduct vacations to Mexico, their car and child care.” You may be thinking, “I must be a sucker,” or “I need a better accountant.”
Here’s how I respond: In the right circumstances, some of those things might be tax-deductible, or partially so. But, let me ask you this: are you trying to deduct personal expenses in your business, or is there a valid business reason for those expenses? Deep breath, ok — your friend may have misspoken or misunderstood what was exactly being expensed. They may have mixed up personal and business deductions or partial tax deduction in the case of travel.
Business tax deductions need a valid reason for the expense — there are no loopholes for us 99%ers — just cheating. That being said, you might not know all the small business tax deductions you could be making. So, here’s a list of expenses you may be missing on your tax return.
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1. Home-Based Business Expenses
If you run your business out of your home, you may be able to deduct a portion of your rent, utilities and other home expenses. Your home office must be used exclusively for business (i.e. not your dining room unless you’ve cordoned it off as an office) or must be the principal place that you conduct your business. The space must also be a meeting place for clients or customers (as of now, Canada Revenue Association’s position is this does not include video meetings.)
2. Vehicle Expenses
You can deduct vehicle expenses you incur for business purposes, but tracking them can be tricky. There are a couple of ways to go about deducting vehicle expenses. For small businesses, we generally recommend you keep any vehicle that you use for both business and personal use in your personal name. This will avoid some potential personal tax liability.
- The first way to do this (and simplest way) is to pay yourself a per-kilometre rate based on CRA’s current allowance rate. This ensures the payment is deductible by the business, but not taxed as income in your hands. You still must personally pay all the expenses such as maintenance, insurance and gas (no double-dipping: i.e. dipping the chip and then dipping it again). The limitation here is this is only an option when you are an employee of your corporation.
- The second way is to tally all of your vehicle expenses for the year and multiply by the percentage you used for business. For example, if you drove 10,000km during the year and 3,000km of that was for business, you could deduct 30% of your vehicle expenses for the year. Yeah, I know, it’s a big headache.
Both methods require that you keep a log of business use of your vehicle, and it has to be meticulously maintained, or the expense could be disallowed. Check out Mile IQ if you are looking for a simpler way than keeping a clipboard in your car.
Bonus tip: Driving to and from work does not suddenly become deductible if you are self-employed! If someone tells you they are deducting that, you can tell them they are doing it wrong!
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3. Research and Development
Ok, this is admittedly a big undertaking, but there are some serious tax credits to be had if you qualify. I won’t write a book on this here as there are a lot of resources out there on the information superhighway, but if you qualify and are not taking advantage of this small business tax deduction … there are no words.
4. Meals and Entertainment
This is a small business tax deduction you should certainly keep in mind! CRA limits the deductibility of most meals and entertainment costs to 50% of the amounts paid, but what businesses can miss is they can have up to six events per year that are fully deductible as long as the whole staff is invited. Party on, Garth!
5. Advertising and Promotional Material
Regardless of the medium, whether you want to advertise online or in print, you can deduct for business advertising in Canada. Word-of-mouth is great, but small business owners can't just wait for their businesses to catch on. They need to be proactive. Whether it's an advert on a local radio station or personalized merchandise at a seminar or convention (i.e. branded mugs, stickers or USB sticks), you can write them off as a small business expense.
5. Charitable Donations
If you have made a charitable donation through your business, that is a small business tax deduction you can claim in your next tax return. Must make sure your charity is a registered Canadian charity — they should issue you with a receipt upon donation. Keep this receipt to make the expense claim. If the CRA asks for proof, you want to make sure you have it to hand!
You Might Be Thinking Too Small
I understand there is a huge worry that you may be missing out on some small business tax deductions — that is fair — but did you know the government also offers some massive incentives to build a successful business. It’s called the Lifetime Capital Gains Exemption, and as of this year is worth $848,252 in tax-free money. As you might expect, there are some hoops to jump through, but basically, if you can build up a business and sell your shares to another party, the gain may be eligible for this exemption. It’s a great incentive to build up a business that has value.
While it’s tempting to focus on saving a few dollars here and there, you are better spending your time focusing on scaling your small business. Hiring a professional accountant is a great way to ensure you are getting the deductions you deserve, so you can focus on what you do best — growing your business.
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