10 Tax-Saving Hacks That Small Business Owners Often Miss
Being a small business owner can get expensive when entrepreneurs are operating on dismal margins and competing for market shares. Every penny counts. However, when you pay more taxes than you owe, owning and maintaining a small business becomes even more expensive.
Here are 10 tax-saving hacks every small business owner should consider and keep in mind as they attempt to grow in today’s market:
- Small Business Deduction (SBD): Section 125 of Canada’s Income Tax Act (“ITA”)
In order to qualify for the SBD a corporation must be a Canadian Controlled Private Corporation (“CCPC”) earning active business income. Note that associated corporations must share the SBD. To begin, a deduction is claimed against income to reduce it; to lower tax liabilities, a credit is sought against tax payable. In reality the SBD is a tax credit rather than a deduction. Furthermore, not all businesses are eligible for the SBD. The tax benefit is available only to certain incorporated businesses.
- Change your business structure
Understand that how your business is structured does impact the types of tax advantage available to you. It is important to have a sense of what you may expect in terms of taxes before you start a business or as your business grows. It is also vital to consider the pros and cons of each structure as your business changes while keeping in mind your ultimate tax goals.
- Make use of various existing tax filing software
It’s never easy to file taxes when you are a small business owners with a lot on your plate. Using tax filing software should make dealing with the not-so pleasant aphorism of “death and taxes” a lot easier. They surely aid in the avoidance of mistakes and reduce significant amount of stress. While this tip may seem obvious, it is often overlooked by the most tax-savvy owners. Utilizing such software provides security. You should use these tools to accurately complete tax returns online and receive full refunds whenever they are due. See number 8 below for more advantages.
- Business equipment deductions
You can avoid tracking depreciation by classifying equipment as a business expenses in the year the equipment is purchased under Section 179 of ITA. Understand that there is a limit to this threshold. Business equipment can be anything that is used and is needed to run a business operation, this can be as small as an office furniture or as important as having a computer device. BONUS TIP- Do not sell your old equipment- determine first whether its best to leave it (ordinary loss) or sell it (a capital loss).
- Deductions for home office
This is especially important during such time where working remotely has become a norm. Many small business owners work from their home but not all are aware of associated deductions. Insurance, mortgage interest payments, repairs, and utilities such as internet access are example of these.
- Well-thought-out record keeping procedures for all business receipts
Receipts provide as a visual representation of how you spent your money over the court of a year. Often these receipts are for goods and services provided through out the year that may be deductible and may help reduce your taxable income. There are specific deductions you can take for various structures as well as deductions which apply to all structures depending on your business formation.
- Keep tomorrow in mind
Keeping long term goals in mind is essential. This includes setting up retirement goals in advance of actually reaching the age of retirement. If you have not yet, now is the time to do so. Indeed, by putting more money into your retirement now, you may be able to reap significant tax benefits at a later stage. It is important to keep inform on various tax strategies and tax planning programs which allows you to combine your taxes with your retirement savings. Your financial advisor can help you determine the amount that is most beneficial to your cash flow, but this is a tax strategy that pays off now and in the future- BONUS POINT. If you do not have a financial advisor- retain one immediately.
- Be aware of any carryovers and keep records
Some deduction or credits may not be fully utilized in a single tax year and may be rolled over to subsequent years. Capital losses, net operational losses, charitable donation deductions and home office deductions are some of the examples of these. Keep track of these so you don’t forget about them from year to year. This is why it’s important to keep #3 noted above in mind. These software’s can allow you to keep track.
- If you are qualified, take advantage of penalty relief
Despite following necessary steps, there is a possibility that penalties may still be incurred. If this happens, you must first aim to determine whether you will be eligible for a penalty relief. Failing to file your tax return or to pay what is owed on time, are some of the examples of penalties that may be eligible for relief.
- Hire family members
Hiring family members who can assist in performing critical duties related to your business can add tax savings to your benefits. When you hire a family member, you can deduct a reasonable remuneration you pay that person as a business expenses therefore lowering your taxable income.
-Ghazal Hamedani, Associate Lawyer
© Kalfa Law, 2021
The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.