While tax season can be stressful for business owners, it may also provide the opportunity to dig deep into your business’ finances in order to set yourself up for success in the coming year.
Business tax deductions may help save you significant money that you can then reinvest in order to grow your business. Small business tax deductions for 2016 totaled over $13.5 billion, according to Statistics Canada. That’s potentially a big opportunity for your business.
If you have a professional prepare your business’ taxes, or use accounting software, it’s important to know what tax deductions are available, and what your business is eligible for; that way you can prepare and keep the appropriate records in order to claim them.
How Do Tax Deductions Work?
Tax deductions (also called write-offs) are one way taxpayers can lower their tax liability — the amount of taxes they pay. When you prepare and file your taxes, you claim the deductions your business qualifies for on your annual tax return.
There are many kinds of deductions, but they have one thing in common: They count against and reduce your total taxable income. In this way, a tax deduction is different from a tax credit, which counts dollar-for-dollar against your tax liability for the year.
For example, if your business income for last year was $100,000 and you claim $20,000 in deductions, your taxable income is $80,000. Your savings from those deductions are the total deduction amount ($20,000) multiplied by the tax rate for your income bracket. If your rate is 25 percent, for example, those deductions would save you $5,000 on your taxes for that year.
Deductions for Small Businesses
There are several potential tax deductions you may want to consider for your business.
1. Rent and Utilities
Whether you rent a physical office space for 50 or one desk in a co-working space, both your rent and any utilities for the office may be deductible business expenses. Utilities include electricity, gas, water, telephone, and internet bills.
If you work out of your home, you may still deduct some of these expenses as they relate to your business use of the space, according to the GOC’s Business-use-of-home expenses.
Running a business can involve a lot of equipment — even if it’s just you and your partner. Luckily, the CRA’s capital cost allowance (CCA) allows you to deduct the cost of equipment your business requires, including:
- Computers and laptops
- Printers, copiers, and fax machines
- Desks, filing cabinets, and other office supplies
- Any specialized equipment unique to your industry (such as a heat-press machine for a company that sells custom t-shirts)
Note: In Canada, you cannot deduct the full value of equipment you purchase the same year you buy it. You must spread out the cost (amortize) over a number of years.
3. Employee Salaries, Wages, and Benefits
Self-employed workers can deduct their own benefit and insurance premiums, and the same applies to small business owners. If you have employees, you may also deduct their salaries (including wages and bonuses) and any benefits you provide to them and their families.
In addition to full-time employees, you may also deduct costs and fees that arise from working with other professionals and contractors directly related to your business, including:
- Independent contractors
4. Advertising Expenses
Some marketing and advertising for a business may be deducted so long as it is geared towards a Canadian audience. Here are some of the most common advertising expenses for Canadian small businesses:
- Business cards
- Branded promotional items
- Website costs (including domain registration, site hosting, and design)
- Digital advertising
- Advertisements placed with Canadian radio and TV broadcasters
- Print advertising
- 100% deductible, if at least 80% of the publication’s content is editorial (non-advertising) material,
- Otherwise, print advertising is 50% deductible.
5. Business Insurance
As your small business grows, there may be several different types of insurance you’ll need — from professional liability insurance, to workers’ compensation and product liability insurance. The premiums for any insurance policies your business needs may be deductible, similar to your health insurance deductible.
6. Bad Debts
In any business, you may have to account for customers or clients who simply won’t make good on promises to pay. Invoicing and accounting software may make it easier for your clients to pay you; however, you still can’t magically make everyone pay their bills. The good news is you may be able to deduct bad debts from your annual business taxes. Here’s what the CRA considers eligible for the bad debts deduction:
- Debt that has occurred in the most recent fiscal year,
- The debt must also be considered as income.
Understand Your Tax Deductions
As a business owner or entrepreneur, you may not get excited about taxes — but deductions are one thing you should get excited about. After all, they’re all about potential savings you can use to grow your business. If you have a solid understanding of the business deductions you qualify for, you may be reinvesting in your business in no time.
This post originally appeared on Wave's small business blog. Learn more about Wave's award-winning invoicing and accounting software free from RBC.
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.