Thursday, 25 September 2014

10 Tax Tips for Owners of a Home-Based Business

10 Tax Tips for Owners of a Home-Based Business

It’s not tax season yet, but thinking about and planning for next spring can be an important for your tax strategy. After all, by the time you get around to looking at your situation, it’s too late to take any action.

When you file taxes as a solo business owner, things are more complicated than those days when you may have a received a tax form (T4) from a single employer. However, you've also got plenty of opportunities to trim your tax bill.

1. Deduct your Home Office

To qualify your home office as a legitimate business expense, it’s got to be a place that is used exclusively for business activities. If your kitchen table doubles as your work desk, you won't be able to deduct it. But, if you've got a dedicated room for an office, or even a portion of a room, you'll be able to deduct some of your housing costs. Look at the square footage of your office area and divide that by the total square footage to find the percentage of the housing costs that you can deduct as a business expense. This percentage can be applied to the rent expense, the mortgage interest paid, and the property taxes paid for the “office space”.

2. Home Utilities

If you're taking a home office deduction, you’re also able to deduct a portion of your utility bills—namely your monthly heating and electricity bills. You can also deduct some of your broadband/Internet bill, your cell phone bill and repairs and maintenance to the “office space” but you've got to take into account that you most likely use your home broadband for non-work purposes as well.

3. Office Supplies

Don't forget all the paper, ink toner, postage, paper clips, etc. that you purchase. These are all fully deductible (provided you can prove you’re using them for your business). How about your new computer or iPad? These can also be deducted. However, keep in mind that if you only have one tablet or laptop, then most likely you're also using it for personal purposes as well. And in this case, you can only expense the percentage of how much the equipment is used for business (i.e. 50% or 60%).

4. Travel Expenses

Did you attend a conference this year? Do you travel to meet a client (and aren’t reimbursed for those costs)? If so, you can deduct these expenses. Here’s what you need to know:

· You can deduct any transportation costs (plane tickets, bus fare, taxis, airport parking, rental car)

· You can deduct your lodging and tips

· You can deduct 50% of your meals for business days

Also, keep in mind that if you have an out-of-town business day on Friday and one on Monday, you’re also allowed to deduct your lodging and meal costs from over the weekend too!

5. Automobile Expenses

If you're working from home, you obviously can't deduct any kind of daily commute—you also can’t deduct your morning trip to the local coffee house (no matter how necessary it might be!). But if you travel to meet a client, perform a job outside the home, purchase business supplies, conduct research, or do any other kind of activity for your job, you can deduct this travel. That includes a standard mileage deduction (or public transit fares), parking, and tolls. To keep the CRA from your door, remember, keep a log of the miles that you drive for business. In the long run, you are going to appreciate this extra step at tax time.

6. Taking a Client out to Lunch

Taking a client out to lunch is a time-honored tradition, but it also causes its fair share of issues tax-wise. First, you can only deduct 50% of the meal, not the whole thing. Secondly, do not go overboard. Revenue Canada red flags this specific deduction when you are a small business.

7. Upgrade your Office Space

If you've been thinking about a new desk, office chair, bookcase, task lamp, or other office furniture, keep in mind that these are all allowable deductions. Trying to expense a new painting might be a stretch, unless you bring clients to your home office.

8. Health Insurance

Self-employed individuals (including sole proprietors) may be able to deduct the cost of health insurance for themselves. Note, you cannot expense health insurance paid on your spouse’s work plan.

9. RRSP’s

Small business owner’s starting out usually have tight cash flows. This is expected. But taking advantage of all your deductions to decrease income is one of your best way’s to defer paying the “tax man”. Set up your RRSP and contribute a minimum amount. You will thank yourself at a later date.

10. Don’t Cheat or Lie

It’s not over when you file your return. Audit season comes next, and the Canada Revenue Agency can ask for your refund money back, with interest, if they disagree with your return.

If you have something to hide, consider making a correction sooner rather than later. The onus is on you to show you have not understated your income, or overstated your deductions or credits. If you can't do that, you may face a penalty of 50 per cent of the taxes you owe.

Worse, if there was a willful intent to cheat the government, you will be charged with the crime of tax evasion. The penalty can be up to 200 per cent of the tax evaded, plus interest and gross negligence penalties too — and in severe cases, jail.

Final Thoughts

If you have any questions or concerns, it’s always best to consult with a tax professional. There’s no reason you should have to pay more than you're supposed to. If you have any questions, or wish to discuss your personal tax situation, please feel free to call us today. We would love to help you with your personal tax situation.

Tammatha Denyes
TD Accounting Services

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