Tax season is almost upon on again and we still see a lot of misconceptions regarding tax write offs for small businesses. Our goal with this post is to demystify the most common tax deductions (the so called tax write-offs) so you make the best out of your tax return in 2022.
What are tax write offs?
A tax write off or a tax deduction is an expense you incur to earn income from your business, such as office and vehicle expenses, advertising, rent, salaries, utilities and more.
It is important that these expenses are tracked and supported with receipts and other documentation so when the time comes to file your taxes, these expenses will help reduce your taxable income and, as a result, you will end up paying a smaller tax bill, which is very beneficial to your business.
Can I write off 100% of my business expenses?
Unfortunately, no. The expense has to fit the CRA criteria of a tax deduction.
On the CRA website they list rules for each expense category. A good bookkeeper should know and understand these expenses, but we encourage you to have a look for your own information.
In this post we’re going to list the most common deductions that businesses will be likely to incur.
Common business deductions
1. Meals and Entertainment
Businesses can deduct 50% of the amount spent on Meals and Entertainment, and this includes food, beverages and entertainment expenses.
For example, if you take an employee for lunch to discuss their performance, or a client to dinner to discuss their business.
Meals and entertainment expense is a type of an expense that will attract CRA scrutiny, so try to keep these expenses consistent year over year.
There are some situations, however, you can write-off 100% of your meals and entertainment expenses:
- Staff parties and events. Christmas parties for example, the general rule to qualify for a 100% write-off is the event must benefit more than just you.
- The other is the cost of meals and entertainment for the purpose of raising funds for a charity.
There are many types of insurance that qualify as tax deductions, and as a small business owner in Canada it’s very likely that you have – or should have – at least one of them.
Some common types of insurance include:
- General Business Liability Insurance
- Business Property Insurance
- Life Insurance
- Business Interruption Insurance
If you are a small business owner and work from home, you are eligible to write-off a portion of these home office related expenses:
- Repairs and Maintenance
- Home Insurance
- Mortgage interest on your residence
- Property Taxes
To understand how much you can deduct from these expenses, you will need to know the square footage of your home office space compared with the total footage of your home. Let’s say your home-office is 150ft2 and the total size of your home is 1000ft2, this means that you would be able to write off 150/1000 or 15% of your home-office related expenses.
In most cases you can write off 100% of your advertising expenditure while at other times you will only be able to deduct a percentage of it:
- Online Advertising – online advertising is 100% deductible and it includes for example your website’s domain name registration and web hosting fees.
- Television and Radio Advertising – in this case, you are only able to write it off if you advertise with a Canadian broadcaster.
- Magazine and Newspaper Advertising – in this case, we have two different scenarios.
- First scenario. At least 80% of the magazine or newspaper has journalistic information: then you might be able to write off 100% of the cost.
- Second scenario. Less than 80% of the magazines/newspaper’s content has journalistic information: then you might be able to write off only 50% of the cost.
5. Vehicle Expenses
Once again, try to keep these expenses consistent year over year, and if it is a mixed used vehicle such as your personal car, you will need to track milage.
If you use a motor vehicle or a passenger vehicle for both business and personal use, the CRA lets you deduct the portion of the expenses that relates to earning business income.
To support the amount you can deduct, keep a record of both the total kilometers you drive, and the kilometers you drive to earn income. I
These are some vehicle expenses that could qualify as business deductions, in full or part:
- Licence and registration fees
- Fuel and oil costs
- Electricity costs for zero-emission vehicles
- Parking fees
- Maintenance and Repairs
- Toll charges
- Interest on money borrowed to buy a motor vehicle
- Leasing costs
These are the six most common write offs that small businesses utilize to reduce their taxable income and – as a consequence – their tax bill. It’s important however, that you keep the receipts for all these expenses as the CRA may require proof of these expenses in the case of an audit.
Staying on top of your deductions can be hard as a small business owner. A lot of entrepreneurs struggle to stay organized all year round and face frustration and difficulties by the time the year end comes. Business owners often lose money simply because they are not able to keep their financial records up-to-date and end up missing the opportunity to write off relevant expenses.
This is where a good bookkeeper comes in place. With qualified ongoing bookkeeping services, you can have confidence that you will be minimizing your tax liability. You could consider your tax season headache free, as at year end your books would be ready to be sent to your accountant.
At Shepherd 360 we offer stellar monthly bookkeeping services, and the best part: it is all done online for your convenience. If you are interested or even if you are still unsure what our bookkeeping services can do for you and your business, get in touch using our Contact Us form and let’s have a chat. No strings attached.
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