Five Tips To Help You Plan For Year-End Business Taxes
When it comes to working on your taxes, you have to worry about getting everything done before the deadlines, or you could end up facing fines and penalties. While people can get through their taxes themselves, they should still consider consulting a specialist. People who know what they are doing would be in a better position to assist and would even know about rules and tax breaks for various aspects of the work you do as compared to people who do not have that information. However, as a business owner, it’s very helpful to know this information yourself.
We created a list of steps to assist people with year-end taxes.
Tip #1: Bring your bookkeeping up to date
It's imperative to have your bookkeeping up to date before the end of the year (both calendar year-end and fiscal year-end). It would allow you to see your profits, how much money you may have taken out of the business and allows for tax planning to minimize business and personal taxes.
As a business owner - a proprietor, you'll pay personal income tax on the business's net income. As a corporation, you'll pay tax on the business's net income and any money you take out personally but don't worry - you're not double taxed. So it's critical to know where your business stands and look for ways to minimize taxes.
Tip #2: Maximize “Office-in-Home” expenses
If you work from home and meet the qualifications, you may be able to deduct a portion of your home expenses as a "tax-deductible" expense to the business and "tax-free" money in your pocket. The rule applies to whether you own or rent a home, condo, apartment, acreage, etc.
There are specific guidelines and rules to follow. And with COVID requiring many individuals to work from home, there may be more opportunities to claim this tax-deductible business expense.
Tip #3: Maximize “Vehicle Expenses”
Again, this is a "tax-deductible" expense to the business and "tax-free" money in your pocket.
Revenue Canada requires you to track your mileage to claim this "tax-deductible" expense. Many business owners don't know this, and accountants often claim a "reasonable" amount. However, if Revenue Canada decides to audit your business and you do not have a mileage log, your vehicle expenses might not be allowed. Software apps like "Triplog2.0" and "MileIQ" make tracking mileage as easy as using your cell phone.
Tracking all the expenses can be tedious and time-consuming: gas, oil changes, car washes, repairs, insurance, registration, etc. If your business is a proprietorship, you have no choice but to track every expense. However, "employees" can claim the "Mileage Allowance Rate" and only have to track mileage.
For 2021, the rates were 59 cents per km for the first 5000 km and 53 cents per km after that. In the Northwest Territories, Yukon, and Nunavut, you can add 4 cents per km to those rates. If your business is a corporation, and you receive T4 Income as an employee of your business, then you too can claim the "mileage allowance" without having to track all the expenses.
Just a note that it might be wise to track all your expenses the first year and see which pays more, the "mileage allowance" or tracking all the details. For my business specifically, it pays more to use the "mileage allowance" and saves bookkeeping time by not having to track the expenses.
Tip #4: To be... or not to be... an employee, that is the question
As an "employee" of your business, you might qualify for several tax-deductible employee benefits, which are TAX-FREE to the employee and TAX-DEDUCTIBLE to the business. They may include "social events" such as a company barbeque, a Christmas party, or "hospitality events" such as a luncheon training meeting where the primary beneficiary is the business. It may also include business courses related to your current or future position, and even business courses NOT directly related to your business, such as stress management or first aid.
As an employee of your business (and remember - a proprietor is never an employee, however, if your business is a corporation it can hire you as an employee), you will have to complete a T4 and have Income Tax and CPP deducted. The business will also pay its portion of CPP. T4 income qualifies for RRSP contributions and is often required for mortgages and personal loans.
As a proprietor, you pay personal income tax on the "Net Profit" of your business, whether you spent that profit on items shown on the "Balance Sheet" such as "fixed assets" (computers, equipment, vehicles, etc.) or loan repayments, etc. You will also have to pay both your portion and the business portion of CPP.
Note that if you - the business owner - are an "employee" of your corporation, generally speaking, you cannot collect EI. Therefore, do not deduct EI premiums from your paycheque. You can choose to "opt-in" to the EI program but cannot "opt-out" at a future date - you will always have to pay the EI premiums.
Tip #5: Money you take out of the business for personal use is taxable
The money you take out of the business for personal use has to be taxed, which is usually done via a T4 (money paid to employees) or a T5 (money taken out as dividends, interest, etc.)
One of the primary reasons to bring your bookkeeping up to date BEFORE the end of the calendar year is to decide the best way to report the money you have, or will, take out of the business to minimize taxes (both personal and business taxes).
If you’re not concerned with RRSPs or applying for a mortgage or loans, then taking money out of the business via a T5 (dividends) might be the way to go. You will pay personal income tax on this, but CPP is not deducted.
In the end, it's best to have a tax professional help you with proper tax planning BEFORE the end of the calendar year. At JB Training Services Inc, we can teach you how to do your bookkeeping, and at Bernal Business Services Inc, we can do it for you.
If you are looking for assistance with finding a Certified Professional Bookkeeper in Edmonton, Alberta, get in touch with JB Training Services Inc. We teach our clients how to use various software programs so they can maximize the “power and magic” hidden within their Financial Statements. We have been in this line of work for the last three decades and understood the ins and outs of bookkeeping to benefit the clients we work with. If you are looking for a better understanding of the services we provide, please click here. If you are looking to get in touch with us or think we can assist with a requirement, please click here.