As a small business owner, you’re well aware of the fact that sometimes you need to spend money to make money. However, there is light at the end of the tunnel, as you are entitled to make certain deductions on your tax return. These expenses/deductions are then subtracted from your business income and can result in a reduced amount of tax owing or an increased refund. Now, every business is unique, but we’ve laid out five of the most common ones below:
Operating Expenses
When you own a small business, you can deduct your operating expenses from your income. Those “operating expenses” are considered anything you use to run day-to-day operations and can include, but are not limited to; advertising, startup costs, delivery expenses, maintenance and repairs, business insurance, employee salaries, and utilities. If you rent your office space or another facility, you can deduct rental and utility costs as business expenses. However, if you operate out of your home, these expenses are calculated differently…
Home Office Deductions
Your home office must be the principal place you operate out of, or it must be used exclusively for business in order for it to qualify for any business-related deductions. Some of these include utility bills, home insurance, and mortgage interest or rent.
To determine the amount that you can deduct as a business expense, you must first calculate the size of your home office as a percentage of the area of your entire home. Then, multiply that figure by the relevant expenses.
If your home office is not used exclusively for business purposes, you would need to determine what percentage of time that your space is used for work. For example, imagine that you work 50 hours per week and use your space as an office 47 %of the time. You can multiply this percentage by the percentage of space your office takes up in your home, and then apply that figure to your expenses.
Travel and Entertainment Expenses
You can also deduct business-related travel expenses such as plane or bus tickets, hotel rooms, car rental fees, and conference fees. Be careful with how much you try to expense, however. There is a line that you do not want to cross in order to avoid your business from being audited.
Vehicle Expenses
If your vehicle is used for your business, you may be able to deduct costs related to that vehicle including maintenance, insurance, repairs, parking, and fuel. However, if you also use your vehicle for personal use, you can only deduct the percentage of those expenses related to when the vehicle is used for business purposes. To determine what percentage you can divide the number of kilometers you drive for work by the total number of kilometers driven for the entire year. Then, you multiply that result from your expenses.
For example, if you drove your vehicle 1,000 kilometers for business with a total of 10,000 kilometers for the year, you can deduct 10% of your vehicle expenses as business expenses.
Employee Salaries and Benefits
Whether you have multiple, or just one employee, as a small-business owner, the gross salaries that you pay to employees and subcontractors can be deducted. This can extend to include employee benefits such as Canada Pension Plan contributions, Employment Insurance premiums and Workers Compensation amounts also qualify as deductions. Be sure these deductions are reviewed by a professional to ensure that the deductions you are filing are applicable to your business.
Time to File
When your time comes to file, keep in mind that you and your business are unique. You may be eligible for deductions you never thought about it, that’s why we recommend you reach out to a professional – like us! Not only do we know (and understand) the nuances of the tax system, but we also keep your success at the forefront of our minds. Understanding and claiming all of the costs associated with your business especially important for two reasons:
- You are subtracting your costs from your income (which means less tax to pay), and
- Recording all of your expenses allows you to see the most accurate picture of your business’s health.
Once you’ve taken all of the costs of running your business into account, you’ll be able to determine if you’re making as much money as you think you are. Let us take care of it for you! Reach out below to get started.