Maybe you currently have a part-time or full-time home-based business or would like to start one some day. About one out of four Canadian households operates a business from home. If you are currently or will be in a home-based business, here are some tips to help save you money.
Many home business owners pay too much tax, because they don’t know all the types of tax deductions available or how to take full advantage of them. Others overpay because they are conservative by nature. And some either receive poor tax advice, or no advice at all. Whatever the reason, if you’re paying too much tax, it’s time to stop. Keep in mind two key points:
You have a right to maximize your tax deductions. It is important to adopt the mindset that a high percentage of your expenses legitimately relate directly or indirectly to earning business income.
You should find a professional accountant with an equally proactive attitude towards maximizing deductions. Accountants typically fall on the conservative side. You should locate one who adopts an aggressive approach to planning, enjoys the professional and intellectual challenges of knowing the “fine line”, and can bring you comfortably close to it. No chartered accountant (CA) or certified general accountant (CGA) would risk their reputation or livelihood by advising you to go over that line.
Anyone can call themselves an accountant, and many do, so select an accountant with a professional designation, such as CA or CGA. Even if you already have an accountant, obtain at least three other opinions from accountants who specialize in tax matters, to ensure that the advice you’re getting is appropriate–you need a benchmark for comparison. If you don’t have an accountant, have an interview with at least three of them before you decide which one, if any, you want to rely on for advice. You can locate these professionals from friends in business, or from the Yellow Pages under “accountants”. Most initial visits are free, but confirm this before the appointment. Before your meeting, put all your questions in writing in case you forget them, and prioritize them in case you run out of time.
Then, apply tax-planning strategies to every decision you make. These strategies should be customized to your situation and updated regularly. With your new bullishness, keep receipts of every expense you incur. Your accountant can advise you later what portion is usable.
Here are the deductions most frequently missed or ineffectively used by home-business owners:
Deduct the portion of your home that is used regularly for business purposes, including work, office and storage areas. If you have customers coming to your home, claim a separate reception area and washroom for business use, or a portion of it if it’s shared between personal and business uses.
To calculate the percentage of home-office use, you can divide the total area (excluding the basement) by the overall square footage used for business-related purposes. Don’t forget to include a portion of the “common area” used for business purposes, such as hallways and stairs. Use the committed office area percentage as a base.
Once you have figured out your business-use portion, apply it to your total house-related expenses to calculate your total business expenses. Allowable home expenses include: mortgage interest and property taxes (or rent), plus insurance, maintenance costs and utilities. Make sure you obtain extended homeowner insurance protection to cover home-office use–this extra premium is 100 per cent tax deductible.
If you have one car and use it for business 50 per cent of the time, claim half of your car-related expenses (gas, oil, maintenance, insurance, interest on car-financing costs) as business expenses. You should maintain a mileage log to support your usage claim. If you have two cars and use one exclusively for business, you can claim 100 per cent of that car’s expenses. Be sure to claim depreciation of 30 per cent on your car and deduct the appropriate portion each year from income. Also, make sure you obtain insurance coverage for your car to cover your business usage. The additional premium is 100 per cent deductible.
Furniture and equipment:
Your office furniture, computer hardware and software, printer, fax machine, copier and other equipment have to be depreciated over time using the capital cost allowance (CCA) formula, which lets you deduct a portion (20 per cent to 100 per cent) each year. The concept of depreciation is that the cost of the asset has to be spread over the projected useful life of the asset. If you have an incorporated business, you can sell your business furniture, computer and car to your business at fair market value. In doing so, you pay no personal income tax on the proceeds, as you originally bought the assets with after-tax income.
Salaries paid to children, spouse, relatives or others to perform work for your firm are all deductible expenses. Payments should be reasonable, and the arrangements structured properly to avoid problems in case of an audit.
You can deduct 50 per cent of your total meal costs (including alcohol, taxes and gratuity) relating to promotion or other eligible purposes–for example, when you take a prospective or existing customer out to lunch or dinner, or someone who is knowledgeable in the industry whose expertise and opinion you want to benefit from. If you attend a trade show and pay for lunch for yourself, you can take 50 per cent of that cost.
If you attend any seminar, conference, convention or trade show relating to your current or future business interest or operation, keep all receipts; they are 100 per cent deductible. Don’t forget to include any parking costs. Also, all subscriptions to magazines and newspapers are tax-deductible if you are incurring those expenses to keep your knowledge current (keeping abreast of trends, ideas, the competition, pending legislation, the economy, etc.). And don’t forget Internet-related costs, such as ISP fees–you are incurring these expenses for research and other business-related purposes.
This is one deduction many people don’t fully understand. With proper tax advice and planning, you should be able to claim up to 100 per cent of all costs, except meals, which would be at 50 per cent. The percentage and eligibility of deduction depends on whether your trip was deemed to be business-related exclusively (100 per cent) or partially (50 per cent). In the latter case, the other 50 per cent could have been a personal vacation.
Remember to obtain professional tax advice which is customized to your specific situation on an ongoing basis. Request a copy of the current year’s free publication Business and Professional Income Tax Guide from Revenue Canada. Ask your accountant about all the tax saving strategies available to you. And most importantly, remain proactive about maximizing your deductions. As they saying goes, “It’s not what you make, it’s how much you keep that’s important”.