Tax tips for the home based business

About one out of four Canadian households operates a business from home. If you are currently one of them, you should know about the tax advantages. Many home business owners pay too much tax, because they don’t know the tax deductions available to 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, here are some tips to help save you money.

First Steps to Take

Don’t do it alone. Because tax laws are continually changing, you should find a professional accountant to work with you. Choose one who understands your business and is willing to help with general advice on saving money and legitimately maximizing your deductions. Accountants typically fall on the conservative side, so select one who adopts a pro-active and strategic approach to business tax planning.

Although anyone can call themselves an accountant, it is best to select one with a professional designation, such as CA (Chartered Accountant) or CGA (Certified General Accountant). Even if you already have an accountant, it may be helpful to have another opinion from one who specializes in business tax matters. It will ensure that the advice you’re getting is appropriate, current and will give you a benchmark for comparison. Ask your business colleagues for a referral. Before your meeting, put all your questions in writing with the key questions first in case you forget them or run out of time.

Following are some tax tips to discuss with your accountant. Then, apply the tax-planning strategies recommended to every business decision you make. These strategies should be customized to your situation and updated regularly as your business grows or changes.

5 Tax Tips You Shouldn’t Miss

 1.         Incorporate your business. Some small businesses think that their business is too small to be incorporated. However there are considerable tax advantages if they do, because the small business tax rate is set at a reduced amount of 13.5% for the first $500,000. Compare this to a marginal tax rate that ranges between 20.6% and 43.7% for business income operated as a proprietorship. (The lower personal legal liability risk is another advantage of incorporating.)

 2.         Maximize your expense allowance.  It is important to keep track of all your expenses and receipts that legitimately relate directly or indirectly to earning business income. These would include furniture and equipment used in the business, salaries, supplies, courses attended, advertising, etc. The list will vary depending upon your business. Your tax accountant can guide you in setting up simple methods of tracking your expenses that will save money when it comes time to prepare your annual tax return.

 3.         Allocating a portion of your home. Deduct the portion of your home that is used regularly for business purposes, including work, office and storage areas. 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.

 4.         Allocating a portion of your car usage. 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.

 5.         Income-splitting. This is a classic way of saving on taxes. Basically, it means that you arrange your income to have it divided amongst other family members (spouse and/or children). That way, each of the individuals will be paying less tax, because of their lower marginal tax rates. The total taxes paid therefore will be less than what you would pay if all the money went into your hands. Some examples of income-splitting include:

–           Spousal RRSP (Remember that the deadline is the end of February.)

–           Paying family members reasonable wages for work in your business. No tax is paid on income up to approximately $10,000 if there is no other source of income, and those who receive the money can make RRSP and CPP contributions.

–           Corporate shares.  By splitting your shares with your spouse and children, you can reduce the amount of total tax paid because the lower the income, the lower the marginal tax rate. For example, you could have 5l per cent of the shares, while your spouse and children share the remaining 49 per cent.

Remember to obtain professional tax advice that 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 Canada Revenue Agency. And, most importantly, remain proactive about maximizing your tax planning strategies. As the saying goes, “It’s not what you make, it’s how much you keep that’s important”.

Diana Gray is the co-author of The Complete Canadian Small Business Guide and Home Inc.: The Canadian Home-Based Business Guide, both published by McGraw-Hill Ryerson. She owns and manages Central Park Business Centre, a full-service business centre that provides virtual office and telephone answering support to small and home-based businesses in Collingwood (