Tax season is upon us and we all know that tax time can be stressful for most – but especially for small business owners who have limited time to spend on preparing their tax returns. Having a plan and being informed can help to alleviate some of the pressures of doing your business taxes. So what can you do throughout the year that will help make tax season easier? Here are some suggestions:
Keep up with your record keeping. Not to sound like “Captain Obvious,” but keeping records of all your expenditures throughout the year will add up. It can be as simple as putting all your loose receipts in a shoe box. But it will much easier at the end of the tax year if you had a system to sort and organize your receipts sorted by month or type of expense and placed in an accordion-type folder. If you adopt this system throughout the year, then tax time will be much less of a chore.
Keep a log of all your transportation expenses. Most people know the importance of keeping a vehicle log for business-related mileage that you put on your personal car. But few people know that some public transit fares can also be claimed as business expenses. The better the records you keep, the more likely you will get the maximum deductible expenses for business transportation. Public transportation costs are now easier to keep track of because of systems like Presto, that allows you to see your public transit usage and create reports.
Splitting your income with a spouse or a child. Income splitting is not a new concept, but it is one that is often underutilized by small business owners. Transferring a portion of higher-tax-margin income to a person with lower income, such as a spouse or child, reduces the marginal tax rate on the higher income. A good accountant can help you to find the right percentage of income to transfer, and get you the best tax rate for your total family income.
Before making a large purchase, learn about depreciation and capital cost allowances. A common misconception made by small business owners is thinking that large business expenditures can be written off all in one year. What they fail to understand is that assets need to be depreciated over several years, and not all in one year. Again, consulting an accountant before making a large purchase can save you not only headaches, but it can also save you money.
Doing your business taxes before the filing deadline will save you money. Besides the interest on unpaid taxes, there are also late-filing penalties that can be assessed by Revenue Canada. The longer you hold off on filing, the more money that comes out of your small business bottom line.
Renting office space can be more cost-effective than owning your office space. Owning office space might sound like a excellent investment for your small business, but just like any other large purchase, the mortgage deduction against taxes will take several years to depreciate. Renting office space is a monthly expense that can be written off each month against your income. Again, check with your accountant to see what line of your small business tax return this expense goes on.