There are more than one million small businesses in Canada. This means that there are more than one million dreams out there getting ready to take shape.
Starting your own business isn't easy, especially when there are so many financial hoops to jump through. Luckily, the government of Canada knows this. And, they're willing to help self-employed individuals get a break.
Specifically, we're talking about self-employed tax deductions for small business owners. Whether you're looking to save money or have more control over your spending, you've come to the right place.
What Expenses Can I Fully Deduct?
Whether you're self-employed full-time or part-time, there are some expenses that you can deduct at the end of the year. According to the Income Tax Act (ITA), you can deduct a range of business expenses:
- Operating expenses
- Office and home office expenses
- Entertainment and travel expenses
- Vehicle expenses
That's right! Expenses that fall into any of these categories qualify for a full deduction. This means that you'll owe less in taxes at the end of the year.
Let's talk about some of the specific purchases that you may be able to deduct.
A business operating expense is any purchase that you make in relation to running your business. Anything that keeps your doors open and the lights on counts in this category.
Here are some examples of business operating expenses:
- Costs and fees related to starting your business
- Fees related to advertising and communications for your business
- Delivery fees and shipping costs for products/services
- Office supplies in a physical office and/or your home office
- Expenses related to your business phone
- Internet expenses
- Utility costs
- Professional fees
- Outsourcing costs
We could go on and on.
If you're unsure about a deduction, we recommend that you consult the Canada Revenue Agency and/or your personal accountant. However, if you're using it for your business, it's highly likely that it can count as a deduction on your taxes.
Office and Home Office Expenses
If you rent an office space, you can deduct the rent that you're paying. And, as we mentioned above, you can deduct utility costs.
If you work from a home office, you can deduct the cost of all of the work and organizational supplies that you're using at home. Your home office and rental office supplies count as deductions for your business.
As far as deducting home utilities, insurance, and more, it can get a little trickier. You'd have to measure the space of your office. And, you should know the area of your home.
With this information, you should find out what percentage of your home your office takes up. For example, a 40 square meter office is 20% of a 200 square meter home.
That percentage is the amount that you can deduct things like rent, mortgage interest, utilities, home insurance, security fees, repairs, and more. In our example, that homeowner would be able to deduct 20% of all of these expenses.
It may seem frivolous to count a percentage like this, but these deductions add up to big savings.
Entertainment and Travel Expenses
If you're travelling to a convention, meeting, or another business-related event, you should track your expenses. You can deduct 100% of your hotel costs, conference purchases, public transportation fees, and more.
However, if you have any entertainment or meal costs, you can only deduct 50% of these. Even though it's only half for these purchases, we still recommend that you track them. The savings add up, especially when you're going to many of these events over time.
Whether you drive a business-exclusive vehicle or you use your car for personal and business use, you can receive deductions.
If the vehicle is exclusive to your business, you can deduct all of the expenses that you have for the vehicle. This includes gas, car insurance, repair costs, parking fees, and more.
However, you can only deduct a percentage of these costs if you use the vehicle for personal and business reasons. The amount depends on how often you use the car for your business.
The calculation process is similar to the home office example we showed earlier. With your vehicle, you want to calculate the number of miles that you use in total as well as the number of miles that you used for your business. Then, turn this into a percentage that represents the number of business miles in total miles.
For example, let's say that you drove 10,000 business miles and 50,000 regular miles throughout the year. Since 10,000 is 20% of 50,000, you can deduct 20% of the costs for the vehicle.
To be safe, we recommend keeping a logbook to track your business miles. Having a calendar for these travel dates can also help to show that you were travelling for business purposes.
Expenses That Fall Between the Cracks
Often, some self-employed small business owners allow deductions to go uncharted. This is usually because they don't know that these things count as deductions.
Here are a few of the expenses that small business owners often forget to claim on their taxes:
- Bank fees on your business account (or for business expenses) that you may receive throughout the year
- Annual charges for business organizations, professional associations, or similar groups
- Parking fees when you're at a business-related event or travelling to a business-related event
- Health premiums from private plans for you and your employees
- Interest that you're paying on a car loan, if applicable
- Cleaning supplies that you use at your rented or home office
- Deductions for business debts and the cost of repaying them
Again, if you're ever in doubt, you should refer to the Canada Revenue Agency or call your accountant. They can help you navigate the best way to get the most for your money this tax season.
And, if you're looking for business health insurance, we can help you get quotes for health insurance plans today. Remember, the premiums are deductible.
The Best Way to Track Your Expenses
Many small business owners opt to track their business expenses. Tracking your expenses as you go throughout the year is easier than trying to compile all of the information at the end of the year.
Tracking Your Business Expenses Through an App
When it comes to tracking your expenses on an app, we recommend using QuickBooks Online or Mint Intuit.
QuickBooks Online is a paid service that can help you track your business expenses. (Keep in mind that you can deduct from taxes the fees that you're paying for this service if you choose to join.)
At the end of the year, you can also opt for a QuickBooks accountant to help you file your taxes. Since all of your financial information is already within the QuickBooks platform, it's easy for the accountant to get access to your business finances.
With this information, he/she can help you find deductible expenses that you may have missed throughout the year.
With QuickBooks' finance tracker, you'll ensure that you're never going to miss a possible deduction.
On the other hand, there's Mint Intuit. Mint is more of a financial planning app, but you can use it to track your business expenses as well.
Just like QuickBooks, Mint connects to your financial accounts and helps you keep track of any expenses that you may have throughout the year.
With this information, you can determine the deductions that you can take at the end of the year.
Mint is a free app. And, while you won't have access to accountants whenever you want, we should note that Mint Intuit is partnered with TurboTax. Thus, you'll have access to TurboTax's accountants.
Deciding between these two applications may come down to your financial professional preference. But, either is a good choice for tracking small business deductions.
Creating an Excel Sheet
Some business owners prefer to track their expenses in Excel. If you have an accounting background, it's likely that you're already comfortable with the platform.
So, you can make spreadsheets that account for percentages and totals. This is better than having to calculate it yourself at the end of the year.
While the Excel sheet can't bring sync with banking information automatically, it can definitely help you visualize your finances better.
Hiring an Accountant
If you don't have much accounting experience, we highly recommend that you hire an accountant. Since accountants are business professionals, their fees and charges are deductible.
Plus, the cost of hiring an accountant will make up for itself in the long run. Most of the time, your accountant is going to save you more money than their service is going to cost.
Managing Self Employed Tax Deductions for Small Business Owners
That's it! Now, you know everything you need to know about self-employed tax deductions for small businesses. And, you can put your small business expenses to good use.
As you're managing your business' financial health, we also urge you to consider opening a business bank account. Luckily, our team here at Insurdinary can help you find the right bank account. Having a separate business account will make tracking deduction much easier.