When running your small business, you have a lot of things on your plate and it can be hard to keep track of everything. You probably don’t want to play Accountant when you have a dozen other projects to juggle, especially when you are first starting up. Ultimately this could result in you falling into certain traps that even experienced business owners may miss. Here are some of the tax mistakes that small business owners should avoid.
INCORPORATION: YEA OR NAY
Incorporating right from the beginning will often be a wise choice for purposes of limited liability. There may be times, however, where you would choose not to. If you are starting your business and have no real concerns over legal liability, it may be a better idea to start as an unincorporated business. The rational for this is that there is little reason to deal with significant legal and accounting costs if you are not yet certain about how your business will perform.
In the first year or two of your business, should you happen to suffer business losses, you will be able to apply your business losses to your personal income. For example, if you have kept your regular job while starting your business, and are continuing to receive a salary, you will be able to apply your business losses to your salary and investment income to reduce your personal taxes.
On the other hand, in a limited company these losses can only be used once you are generating a profit, which may take some time.
Keep in mind that you are able to transfer your business into a limited company later on (on a tax-deferred basis) once you begin to see a profit. This will have protection due to limited liability, at a lower tax rate.
BUSINESS VS. PERSONAL FINANCES
If you do incorporate your business, one advantage is that you are forced to keep your personal finances separate from your business. This results in much easier accounting and helps avoid any of the issues that may arise from using a business account for personal needs and desires.
To prevent any confusion, avoid mixing your business and personal expenses. Keep a separate bank account for your unincorporated business and use that for your expenses. Likewise, if you have credit cards, designate which ones are personal and which are for business, ensuring to pay each one from the appropriate account.
KEEP THOSE RECEIPTS
Keep copies of all your business receipts, it is far too easy to lose or forget them, but you will need them at tax time. Keep receipts for payments made with your credit card as well. CRA will not accept your credit card statement for business expenses paid by your card.
Hang on to any receipts that are appropriate for business expenses. You may wish to make a small notation on them in order to differentiate between business and personal expenses.
Other receipts to keep include those related to a home office. These will include invoices for utilities, mortgage interest and taxes. If it is related to your business, keep the receipt.
Claiming vehicle expenses related to your business is possible. Keep track of where you are driving and your mileage each day. Simply driving to and from the office cannot be claimed as a business expense, but if for example, you visit customers both on the way to and from work, or if you drive to a supplier, then your driving for that day would be considered as business use.
The CRA requires you to provide 3 months’ worth of logs in a year as proof of business use. There are now many mileage tracking apps available that can make tracking your mileage even easier.
FAILURE TO REPORT PAYMENTS
No matter how you are paid, you are required to declare it, this includes cash payments and trade in exchange for your work. Serious penalties up to and including jail time await those who are found to have not declared all income.
Mistakes can and do happen. Things are overlooked and forgotten. As always, though, it is worth taking the time to review and look for anything that you may have missed to avoid any potential headaches.
A Chartered Professional Accountant will be able to help navigate you through your tax planning. Give us a call!
***This blog is for information only and not to be used as tax advice or planning without first seeking professional advice. Information is also subject to change without notice.