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What is considered a business expense? How much can I deduct? How do I reduce the amount of tax I pay? These are questions I hear all the time.
And my answer is always the same. You can claim anything you want…as long as it is incurred for business reasons. And if it isn’t ONLY for business or you are unsure, that’s where your Accountant comes in.
But generally speaking, you can claim any reasonable expense that you incurred to earn income for your business. You can find a list on CRA’s website. Keep in mind that there are a few anomalies, but let me start with some of the basics:
- Advertising: this may include business cards, yellow pages, Google ads, website costs, promotional items (i.e. t-shirts, mugs, pens, etc.), letterhead, and envelopes.
- Bad debts: this includes clients, customers or patients who have not paid for their goods or services which were included in the income earned by the business for the current or prior year.
- Business Start-Up-Costs
- Business taxes, fees, licenses, dues, memberships, and subscriptions: includes business license, professional memberships or associations (i.e. electrical or plumber association, Chamber of Commerce).
- Business-use-of-home expenses: includes a portion (based on square footage) of your hydro, gas, water and sewer, property taxes, strata, alarm system, insurance, mortgage interest or rent. To be eligible to claim your home office expenses, it must be your principal place of business or the space must only be used to earn business income and you use it regularly and ongoing basis to meet clients, customers or patients.
- Capital cost allowance (CCA): when you purchase items that are used for the business and are considered depreciable property (i.e. furniture, vehicle, computer, equipment, software, etc.), you can only claim a certain percent over a period of several years, known as CCA. The rates for each type of item can vary.
- Delivery, freight and express: includes the costs incurred to receive products or to distribute products by way of postage and/or delivery.
- Donations
- Insurance: includes premiums for buildings, machinery and equipment and professional liability; this does not include life insurance.
- Interest: includes any interest incurred on money borrowed for the business (i.e. line of credit, credit card, and mortgage).
- Legal, accounting and other professional fees
- Maintenance and repairs: includes expenses incurred to maintain your building and equipment.
- Management and admin fees: includes bank charges.
- Meals and entertainment has many special rules but generally these expenses are only deductible at 50%. Entertainment may include tickets and entrance fees to an entertainment or sporting event, gratuities, cover charges and room rentals such as a hospitality suite.
- Motor vehicle expenses: includes insurance, gas, repairs & maintenance, vehicle registration, lease or CCA on the purchase, interest on the purchase. If a personal vehicle is used, the expenses are based on business use similar to business-use-of-home expenses. (remember to keep a log of your total personal and total business kms driven as CRA will request it when audited)
- Office expenses: may include stationary, pens, printer cartridges, tape, staples, etc.
- Professional development: may include a course, convention or training for staff.
- Property taxes: DOES NOT include business-use-of-home.
- Rent: DOES NOT include business-use-of-home.
- Salaries, wages and benefits: includes amounts paid to staff, medical premiums paid by the business, gifts and awards to staff, WCB premiums.
- Sub-contractors
- Supplies
- Telephone and utilities: may include business line (not home phone), fax line, mobile phone, Internet or iPad data coverage.
- Travel: may include parking, bridge tolls, ferries, flights, trains, hotels, meals on a flight.
The items I most commonly see that are forgotten about include bank charges, interest on credit cards or lines of credit which are used by the business and interest expense on vehicle loans.
Key advice I give to my clients to help keep track of their business is S.O.S.:
- Keep it Simple: whatever you do, it does not have to be complicated.
- Keep it Organized: use a filing system and sort your receipts regularly. Keeping them all in one place will make sure that you don’t lose anything. Although we live in an electronic world, many of our receipts are still printed. Keep it all in one place – print and file everything. Until it is all electronic, keep receipts together by printing them.
- Keep it Separate: your business, especially as a sole proprietor, needs its own bank account and credit card. Mixing your personal and business expenses will make doing your accounting and taxes extremely difficult and far more time consuming than it needs to be.
Paying taxes is really your choice as a business owner. As I tell my clients, you can claim whatever you want. That is a risk that YOU are willing to take. It’s like investments – what’s your risk tolerance? Is it low, moderate, or high? What risk are you willing to take in dealing with CRA? What risk are you willing to take in paying interest and penalties or being audited? What risk are you willing to take in being flagged and questioned year after year? So you can claim whatever you want. But, what’s reasonable? What’s legitimate?
There are many expenses that are in a grey area. Let’s say you take a prospect out for lunch. What if the prospect is also a friend? Maybe they are a friend who has a prospective business for your company? Maybe you get business and maybe you don’t; do you still claim it? Did you talk about business? Is it considered business when it’s a friend? Do you think it’s a business expense? Are they a prospect or is it just a lunch or dinner with a friend? Only you can decide that. With the guidance of a Professional Accountant, these are some of the things that we can help you determine; whether or not it was truly a business meeting.
Always seek the advice of a Chartered Professional Accountant first.
***This blog is for information only and not to be used as tax advice or planning. Information is subject to change without notice.