Small business owners must manage inventory, payments, invoicing, payroll, customer service, and business development. And we haven’t even talked about taxes yet. Much like dentist’s appointments – necessary but uncomfortable – taxes can be intimidating.

Doing your taxes correctly and staying curious can make the process easy, even for complex small businesses. Like any difficult discipline, the key is to understand the fundamentals. In this blog post, we discuss one of these fundamentals critical to your business, helping reduce the tax you pay and freeing up that necessary cash flow, the lifeblood of your operation. Let’s talk about deductions.

What do tax deductions mean?

Tax deductions (or tax write-offs) are business expenses deducted from your gross income to calculate your taxable income. Understanding deductions and applying them to your returns can lower your tax bill and give you a sense of how the CRA categorizes expenses. Tax deductions in most frameworks usually include expenses like office rent, equipment purchases, business travel, and personal development.

Subtle nuances in tax policy are essential, which can change from one country to another and even in the same country each year. That’s why staying on top of these policies is critical as you create an efficient and profitable business.

Before we begin

We will detail the deductions our small business customers use most often. First, some caution. The information you’re about to learn will only be helpful if you already have a routine of excellence, i.e., a sequence of habits that makes it easy to manage and track your expenses. Remember these five principles:

  1. Always use different accounts for your business and personal expenses.
  2. Track and categorize all your expenses, no matter how small or how spontaneous
  3. Keep and digitize all your receipts.
  4. Be diligent with your accounting practices to claim as many business expenses as possible to reduce your tax liability.
  5. When in doubt, check. Life offers opportunities for uncertainty and speculation. Your taxes are not one of these.

Without further ado, here is your primer on tax deductions for small businesses.

Essential tax deductions for Canadian small businesses

The CRA offers a detailed breakdown of all business expenses. As with any tax-related information, your accountant and the CRA should be your main reference points. For ease of understanding, let’s look at the most common tax deductions for Canadian small businesses.

1.    Business start-up costs

As the name suggests, start-up costs include all expenses related to launching your business. These can include equipment purchases and professional fees for services such as legal advice, office supplies, or insurance. You can even claim costs incurred before business operations begin as long as the expense is in the same fiscal year as the start of your operations. Interpreting start-up costs can be a subjective exercise. While the CRA website has detailed clarifications, they can be hard to understand for many people.

2.    Business use of home

Many small business owners work from home or work for several hours at home. In either case, you may be eligible for a deduction. The main factor in determining your deduction value for a home office is its size in relation to the rest of your home. For example, a 1000-square-foot home with a 200-square-foot home office would qualify for a 20% home office-related deduction.

3.    Advertising and promotion

To sign up for your product or service, your prospects need to hear about you. That’s why advertising and promotion are so important. Canadian small business owners are lucky because promotion expenses from radio spots to newspaper advertisements and social media advertising are tax deductible. Remember to keep your invoices in order and have them ready when the tax deadline approaches.

4.    Personal development

It pays to learn, and the tax people understand this, too. Courses, online workshops, seminars, conferences or any organized learning that maintain, update or upgrade your existing skills can be deducted from your tax liability. Just make sure these skills are related to your business. If found to be unrelated, your expense may be treated as a capital expense and not a current item, making it ineligible for a deduction.

5.    Travel

All your work-related travel and expenses can be claimed. These include plane tickets, car rentals, accommodation, meals, and entertainment. The CRA limits these expenses, so be sure to understand where your deductions are capped to avoid filing the wrong claim.

6.    Professional fees

Professional fees paid to accountants, lawyers, or consultants are also eligible expenses for a deduction, whether you’re hiring independent contractors or firms. The tax policy aims to subsidize the costs necessary to run a business, so a useful filter is to understand which expenses are critical to operating your business and then check if they can be deducted.

The complete list of tax deductions is much longer, but these essential items are a good starting point. You should note that many of these deductions are subject to interpretation and your ability to substantiate that they qualify, which makes it critical to stay informed and organized. There are few better ways to do this than with professional help.

Contact Glenn Graydon Wright LLP in Oakville for all your Small Business Taxation Needs

Glenn Graydon Wright LLP understands your specific needs. Our experienced advisors offer expert advice from starting up to all through your growth journey. To learn how our comprehensive accounting services can help you in Oakville and throughout the GTA, use this form, email, or call 905-845-6633.