Understanding Small Business Taxes

Does the thought of small business taxes make you feel dizzy? We don’t blame you. It’s a lengthy, often confusing process that can feel overwhelming at times; especially the closer you get to tax season.

Even though filing taxes related to your small business can be a daunting task, you have a legal responsibility as a business owner to do so. To make it less frustrating, it’s best to fully understand the different approaches to filing taxes available to your business, how to prepare for them and what documents you’ll be responsible for. In addition to all of this, you will also need to be mindful of different tax breaks & benefits that exist for small business owners.

Let’s dive right into it.

Keep Track of Your Records

Good record-keeping is essential for anyone running a small business. Take a few minutes out of your busy day-to-day schedule to focus on the following:

  • Organize your receipt and track your income
  • Label all expense receipts
  • Sign up for e-billing for utilities
  • Use business software or apps such as Quickbooks

Prepare For Your Small Business Taxes

The process of filing your small business taxes becomes much easier when you have all your financial documents prepared. Don’t set yourself up for disaster by rummaging through your files to gather documents before the deadline. It usually doesn’t end well. So here’s a list of documents you should gather:

  • Business identification
  • Payroll documents
  • Bank & credit card documents
  • Accounting documents
  • Partnership documents (if applicable)
  • Last year’s business tax returns

Additionally, you will need to have receipts and documents of all income and expenses for your business. This will provide you with a much more accurate statement when you are filing your small business tax returns. These include sales records, employee wages, professional fees, contract payments, marketing, and advertising costs, office supplies, returns and allowances, all communication devices and more.

Before talking about tax deductions, let’s take a look at how to calculate your income tax.

Income Tax Calculation Process

In order to calculate your income tax, you need to calculate your business income. This means subtracting your gross business receipts or sales by the cost of your goods sold. The result will be your gross profit. Then you deduct your other business expenses.

Overall, any income earned resulting from operating your business is “business income”. This must be reported on your business tax report.

Now let’s take a look at 3 small business tax deductions and how you can take advantage of them.

Need a loan to start or expand your business? We got you covered. Apply today!

3 Small Business Tax Deductions

As a small business owner, you would be doing yourself a disservice if you didn’t consider using deductions to reduce your taxable income. Some of the most common business deductions are:

  • Meal and entertainment expenses
  • Home office deduction
  • Casualty losses
  • Vehicle expenses
  • Business gifts
  • Travel expenses

These tax deductions apply to almost all small businesses. It’s wise to take advantage of them so you don’t end up overpaying for your taxes.

Vehicle Expenses

If you use a vehicle for business purposes, you can deduct the cost of operating the vehicle. Keep in mind, you can only deduct a portion from your taxes which depends on the usage. So for instance, if 60% of your vehicle mileage is for business purposes and 40% for personal, you can deduct 60% of the expenses related to the vehicle. In order to do this, you have to complete “Chart A – motor vehicle expenses” of form T2125.

Tip: The CRA (Canada Revenue Agency) requires you to keep a record of kilometres used to earn income in order to support your claim.

Insurance

Most business owners protect their company with business insurance. If you already pay for your business’ health, policy and malpractice, you can deduct all of it from your small business taxes. The same thing applies to home-business insurance. It is basically commercial in nature and separate from personal home insurance. So it’s best to get home-based business insurance and use it as a business tax deduction.

Rent & Property

Whether you run your business in an office space or have a storefront, you can deduct your rent payments on your small business taxes. If you are running a home-office business, you can also deduct expenses for the business use of your space – as long as you use it to earn income and to meet your clients, customers or patients. The catch here is you can only deduct a portion of these expenses depending on how much of your home space is dedicated to your business. On form T2125, under “calculation of business-use-of-home-expenses” you can calculate your claim for home-business expenses.

Why filing your taxes on time as a business owner is important

As a business owner, filing taxes isn’t just a legal obligation, it is also a major consideration for commercial banks and reputable lenders in assessing the risk associated with providing businesses financing.  When businesses fail to file their taxes, it has major negative implications towards their ability to apply for, and receive, an affordable small-business loan.

It is a common misconception that businesses who incurred financial losses in their most recent fiscal year do not have to file taxes. Generally speaking, you will not be required to pay any taxes, but it is still in your best interest to accurately file taxes for a variety of reasons, listed below:

  1. If you don’t file your taxes on time, or at all, you will be subject to various interest payments, penalties, and fines set out by the CRA.
  2. You create difficulty in obtaining new financing, as commercial banks and reputable lenders will ask to see your filed taxes.
  3. Your interest rates will be higher, as lenders who do not ask for access to tax information will generally charge high APRs (30-60%).

Negative effects of not filing taxes

The mistake, of not filing taxes, can result in an increase of both direct and indirect costs, and limit the potential growth of your corporation when additional financing is sought after at a later date. The reasoning is that potential creditors have a hard time assessing your risk levels, and not filing taxes can often disqualify your business from the loan approval process. Lenders and creditors willing to accept this level of risk will provide you a loan, at an extremely high-interest rate, to compensate against the perceived risk of default.

In addition, you may be losing out on transferable tax credits, generated during the fiscal year that has potential to reduce your income the following year – such as Capital Cost Allowance (CCA) and charitable donations. These tax credits can provide your business in a reduction of income tax in your next fiscal year. Taxes must be filed within six months of your fiscal year end. The Canadian Revenue Agency (CRA) website contains a large amount of information and a detailed breakdown, regarding income tax for corporations, and should be used as a guideline for any questions regarding filing taxes.

So, there you have it. Admittedly, there’s a lot that goes into small business taxes, and it might seem daunting, but you’ve got this! Remember that filing your business taxes on time is essential, and to do everything right, you have to stay organized throughout the year and prepare for tax season ahead of time.