Originally published in January 2016 on Sootoday.com
There are many reasons to start a business — to earn extra money, be your own boss, do something you love, even change the world.
But as we approach tax time, many of you may not realize that a small business can provide significant tax benefits as well. Because a small business can incur significant costs during startup and beyond, these expenses can be written off against the business’ and even your personal income.
Now, before we continue, I want to provide the disclaimer than I am not an accountant, tax attorney or even a bookkeeper – and I cannot legally provide tax advice. I will however, talk about my own experiences. I have been an entrepreneur for many years, and have benefited personally from small business write-offs (mostly from part-time businesses).
While there are advantages and disadvantages of different business structures such as partnerships or corporations, for tax purposes I prefer the simplest of all business structures – the sole proprietorship.
“The owner of a sole proprietorship has sole responsibility for making decisions, receives
All the profits, claims all losses, and does not have separate legal status from the business”.
– Canadian Revenue Agency
In a sole proprietorship, any business losses are written-off against your personal income. In other words, if expenses exceed revenues (considered a business loss) in your business, then the loss can be used to actually lower your taxable income.
Depending on the type of business you are in or plan to start, the expenses involved in buying equipment, software or tools could be significant. Not to mention other costs like rent, advertising, and high-speed Internet. All of these expenses, especially in the first few years, may result in a business loss (on paper) which in turn may provide a write-off against your income.
Do you run the business out of your home? Then the portion of your home utilized for the business – a home office, garage or kitchen table may be written off. In other words, based on the square footage of that work space (let’s say 10% of the home’s square footage), a percentage of your utility bill, Internet, telephone and other costs may be eligible. These deductions can really add up.
Do you use your personal vehicle for business? Do you drive to client meetings, travel for your business, or make the odd delivery? Then a portion of the costs of operating the vehicle for your business may be deductible as well. But make sure to keep accurate records of the mileage, fuel and other costs associated with the vehicle. A log book is handy to record mileage each time the vehicle is used for business.
While some costs can be directly deducted against revenue, others like equipment and other assets need to be amortized over several years (capital cost allowance or CCA), based on Canada Revenue Agency rules. For example, typically a computer is considered a Class 10 property with 30% CCA. In other words, 30% of the cost of the computer is deductible each year – however, in the first year of use only half of that can be deducted. Therefore, for a $1,000 laptop purchased for the business, $150 is deductible the first year, $300 the second year etc. until the full amount is deducted.
Sound complicated? To ensure you are following the rules, as well as maximizing small business write-offs, I highly recommend the use of a bookkeeping or accounting firm. In my case, I have utilized bookkeeping services from Marian’s Bookkeeping for many years – for both business and personal taxes.
Often times running a part-time or side business can provide the greatest tax benefits, because of the additional deductions, which in the end are applied against your salary or personal income from your full-time job.
But before you decide to turn a hobby into a part-time business or start a business just so you can write-off all of your electronic gadgets, consider this. For the CRA to consider your business as “real” and allow you to utilize small business deductions, your business must have a reasonable expectation of profit. In other words, turning a hobby into a new business (photography for example) is ok, as long as it is not just an excuse to buy all of the latest camera equipment for your own personal use. You must actually be attempting to bring in revenues and eventually earn a profit. This is an important distinction – one to definitely keep in mind.
So if it wasn’t already a fantastic idea to start your own business, tax deductions can make the idea even sweeter. Think about that as you write that cheque to pay your taxes this spring!