Tax laws have been haunting business owners for quite a long time. The complexities of the laws, late tax filing and improper management of documents are some of the reasons that business income taxes become stressful for entrepreneurs. To avoid making costly mistakes, it’s necessary for the small business owners to utilize the help of a tax professional and apply some tax saving strategies.
If you’re a small business owner who needs help lowering his/her business income tax bill, then this blog post is definitely for you. Our team of experienced accounts professionals has compiled 5 tax saving tips for Canadian small businesses that can help with tax planning.
9 Tax-Saving Tips for Small Businesses
1) Keep Separate Accounts for Business and Personal Finances
Many business owners use a single bank account for personal and business funds. But, this can lead to confusion at the time of tax filing as you need to differentiate between the incomes and expenses made for business and for personal use. That’s why it’s important to have separate bank accounts to manage the books easily and save time while organising tax deductions.
2) Collect Receipts of Business Expenses
Develop a habit of collecting receipts for business-related activities to maintain a proper record. From coffee for the office to the holiday gifts you purchased for your clients, record every small expense as they add up at the end of the year. Credit card statements are not considered as proofs of expenditure by Canada Revenue Agency (CRA). Therefore, collect original receipts, record and file them appropriately to use them at the time of tax calculation.
3) Split Income with a Family Member
Income splitting refers to shifting income of a family member who is from a higher tax bracket to another family member falling in a lower tax bracket. It is a tax reduction strategy used by entrepreneurs to cut taxes. Instead of giving salary to your family members by hiring them, make them shareholders of the company and pay them dividends. This will save you from the hassle of showing an employment contract to the CRA. You can split your income with your spouse, parents or any other family member and reduce your overall tax liability.
4) Set up a Retirement Plan
Setting and funding a retirement plan for you and your employees can provide several tax benefits. When setting up a retirement plan the employer’s contributions to the plan is deducted from the taxable income, assets in the plan are tax-free and the income earned in the Registered Retirement Savings (RRSP) are usually exempted from tax.
5) Take Advantage of Tax Credits
Tax credits are the amounts of money that taxpayers are allowed to subtract from their taxes. They should not be confused with deductions and exemptions that are reduced from the taxable income. On the other hand, tax credits are reduced from the actual amount of tax. Entrepreneurs can use tax credits to lower their business income. The most popular Canadian tax credits are: scientific research and experimental development tax credits; apprenticeship tax credits; and foreign tax credits.
6) Take Advantages of Tax Deductions
This is one of the most obvious ways to save on your taxes. Here are some of the most common tax deductions that small business owners can claim in Canada.
- Business operating expenses: Rent, insurance, heating, electricity, and office supplies
- Vehicle and travel expenses: Insurance, lease payments, toll charges, maintenance, and fuel
- Capital property: vehicles, equipment, computers, fixtures, and furniture
- Media advertising expenses: Canadian market magazines, newspapers and websites; Canadian market television and radio broadcast stations
- Business management costs: Annual license fees, commercial taxes, membership payments for professional organizations, online marketing fees, mail and delivery charges, and professional consulting fees
7) Maintain Complete and Accurate Records
No matter how small your business or how low your taxable income, you still need to provide income details with your tax returns. That’s why it’s important to keep track of your earnings and expenses so you can prove the deductions you’re claiming. You may not have considered the need for online accounting and bookkeeping services yet, but keeping your financial records year-round is key to tax savings. Aside from helping you review your business performance, it also helps you stay prepared for tax season.
8) Increase Your Charitable Income Tax Credits
Charitable donations to registered Canadian charities or other qualified agencies can earn you tax credits. A charitable amount of over $200 can earn you a higher tax credit because they’re assessed at a higher rate. In order to maximize your charitable income tax credits, donate more to registered Canadian charities. For instance, if your annual business earnings amount to $30,000 and you donate 5% of that, your charitable contribution would be $1,500 and you’ll receive a reasonable tax deduction. Remember that donations to non-registered Canadian charities, American charities, and political parties are not eligible for these deductions.
9) Look for Home-Based Business Deductions
You may be eligible for tax credits if you work from home or run a home-based business. The deductible amount is typically estimated as the percentage of square footage used for work, together with the electricity expense, work supplies, insurance costs, property tax, security and maintenance cost. If you own your home, you may also receive credits for your property tax and mortgage interest.
In order to claim this credit, there must be a dedicated workspace in your home and it should be used at least 50% of the time for conducting productive work. The best thing about this credit is that it applies to both people with home-based businesses and employees working from home. If you are a work-from-home employee, you need to ask your employer to fill out and sign a T2200. Although you won’t have to submit it with your annual tax package, you must have it on file in case the Canada Revenue Agency wants to review your expenses.
Use these tax-saving tips and start reducing your business income tax today. To make things easier, consider paying income taxes every month or else last-minute tax planning might lead to confusion. Maintain your books properly to get a clear financial picture of your business that can help in tax calculation. If you’re facing difficulty in recording transactions and maintaining proper records, then contact a trusted bookkeeping provider.