How to Maximize Your Small Business Tax Deductions
The companion article, Maximize Your Small Business Tax Deductions, discusses keeping track of your business expenses throughout the year, small business tax deductions related to the cost of doing business, and home business deductions. This article covers:
- Automobile expenses
- Travel expenses
- Employing family members, such as your spouse or child
- Advertising and other expenses
Once you've read through both of these tax articles, you'll have a complete list of business expenses that you can check before handing your receipts and documents over to your accountant or use to complete your own income tax form — while maximizing your business income tax deductions.
Small Business Tax Deductions Related to Vehicles
The cost of fuel, motor oil, and lubricants used in your business are allowable tax deductions. (This includes gasoline!) You can also claim the license and registration fees, insurance, and the cost of vehicle maintenance and repair. If you've borrowed the money to buy a vehicle, you can claim the interest on your loan as a business expense. If you've leased a vehicle, you can claim the leasing cost.
The catch with vehicle deductions is to be sure you distinguish between business and personal use. If you have a vehicle that you use for both business and pleasure, you can only claim the portion of automobile expenses related to business use as a business tax deduction.
For more details about these expenses and how to claim them as business deductions, you should read What Motor Vehicle Expenses Can You Claim on Income Tax in Canada?
To document these expenses properly and to make sure that you're claiming as much of a tax deduction as you can, you'll need to keep a vehicle logbook. How to Keep a Logbook to Claim Motor Vehicle Expenses explains how.
If you've used more than one vehicle to earn income over the past year, it's important that you keep separate records for each vehicle, and calculate your expenses accordingly.
The Motor Vehicle Expenses section of the Canada Revenue Agency's Business and Professional Income Guide explains the three classes of vehicles for income tax purposes. The CRA distinguishes between motor vehicles, automobiles, and passenger vehicles, and the class of vehicle you have can affect your allowable deductions.
For instance, if you borrowed the money to buy a passenger vehicle which you use to earn income, the amount of interest you can deduct is limited, as is a number of leasing costs you can deduct.
If you have bought or are going to buy a vehicle for business use, you also need to be aware of Capital Cost Allowance, the tax method you must use to write off the cost of that vehicle over a period of years. How to Claim CCA (Capital Cost Allowance) on a Vehicle Bought for Business Use explains how to do it.
The Guide also gives an example of how to calculate the amount of deductible interest on money you've borrowed to buy a passenger vehicle you've used for business purposes.
Small Business Tax Deductions Related to Travel
While you can't usually claim any of your living costs as business expenses, expenses you incurred while you were away from home if your travel was related to earning business income are legitimate income tax deductions. Once again, any and all such deductible expenses need to be documented with receipts.
You may, for instance, be able to deduct the cost of accommodation or the cost of taxis or other transportation. You may be able to claim the costs of meals, beverages, and entertainment as well, although you won't be able to deduct their full cost.
The general rule for tax deductions related to meals and/or entertainment is that you may deduct up to 50 percent of the cost of meals and/or entertainment, or "an amount that is reasonable in the circumstances, whichever is less" (Business and Professional Income Guide, CRA). For detailed information about these expenses, you should read The Rules for Meals and Entertainment Expenses on Canada Income Tax.
Conventions are another income tax deduction you don't want to overlook. You can deduct the cost of attending two conventions or conferences a year as a business expense, as long as the conventions you attend are directly related to your business (so going to the Grey Cup won't count, but attending a trade show might). You'll find the details about how to deduct convention expenses in The Rules for Meals and Entertainment Expenses on Canada Income Tax too.
If the cost of the convention doesn't include the cost of meals, then the general rule applies, and you can deduct up to 50 percent of their cost. If the cost of the convention does include the cost of meals, beverages, and/or entertainment, and these aren't shown separately on your bill, then calculate the cost of these by subtracting $50 for each day these are supplied from the total amount of the convention cost. Sorry — food and beverages don't include incidentals such as coffee or doughnuts!
Small Business Tax Deductions Related to Family Employees
Many small business people recruit their family members as workers as a matter of course. In terms of income tax, this makes your child or spouse an employee and a business tax deduction. If you've employed your child or spouse, you can deduct his or her salary as a business expense, just as you would the salary of any other employee (and report the salary on a T4 slip, of course).
But the full answer to the question of whether or not the spouse or child you employed in your business last year qualifies as an income tax deduction depends on whether or not you have met the CRA's conditions.
If you're going to deduct your family employee as a business expense, you must:
- Pay the spouse or child a salary
- Pay the same amount of salary that you would pay someone else to do the job
- Pay a salary that is reasonable for the child's age
- And the spouse or child must be doing work that is necessary for earning business or professional income
ALL of these conditions must be met before your child or spouse is considered a legitimate employee for income tax purposes.
Receipts always matter, so if you pay your spouse or child by cheque, keep the canceled cheques for your records.
You may pay your child or spouse with a product from your business instead of cash if you wish. If you do, then you would claim the value of the product as an expense in your income tax, and add to your gross sales an amount equal to the value of the product, while your child or spouse would include the value of the product in his or her income.
For more information about treating your spouse or child as an employee, see the Salaries, Wages, and Benefits section of the CRA's Business and Professional Income Guide.
Small Business Tax Deductions Related to Advertising
The costs of advertising your small business will be business tax deductions if the advertising venues are Canadian. That is, you can deduct the cost of advertising your business in a Canadian newspaper, magazine, or on a Canadian TV station or radio station as a business expense.
But the advertising section of the Business and Professional Income Guide cautions that you can't deduct expenses "for advertising directed mainly to a Canadian market when you advertise with a foreign broadcaster; or in an issue of a non-Canadian newspaper or periodical."
Presumably, then, you should also be able to deduct the cost of advertising in a Canadian ezine or on a Canadian website as a business expense, but not the cost of advertising in ezines or websites that originate in other countries.
'Other' Allowable Small Business Tax Deductions
This catch-all category of business expenses covers everything from Disability-Related Modifications and Small Tools through PHSP (Private Health Services Plan) premiums. If you've incurred business expenses that don't seem to fit into any other category, chances are good they'll fall into this one.
Small Business Tax Deductions Related to Legal and Accounting Services
All of your accounting and legal fees are legitimate business expenses. You can also deduct consulting fees, such as the cost of getting professional advice about maintaining your books and records.
Deducting All Your Allowable Expenses Pays Off
These are only some of the business expenses that qualify as income tax deductions if you're operating a small business, according to the Canada Revenue Agency (CRA). It's worth taking the time to be sure that you're deducting all of the business expenses you're entitled to because your business expenses will make up the bulk of your small business tax deductions.
And if you're in doubt about a particular expense you've incurred over the past year, remember, consulting your accountant is not only the smart thing to do but tax-deductible, too.
For more information on potential business income tax deductions, such as maximizing your non-capital losses and Capital Cost Allowance, you should read 8 Tax Strategies to Reduce Income Tax in Canada.