Small business owners wear multiple hats. From market research and client meetings to managing their books accurately, there is too much to do beyond even the thought of tax time. By the time it’s tax season, it’s far too easy to neglect some key tax deductions when you’re busy managing other areas of your business.
The first step to making sure you never make the same mistake twice, is recognizing that you’ve made a mistake in the first place. We are sharing 6 common mistakes that small business owners make at tax time:
Mistake #1: Allowing lesser known tax deductions to fall between the cracks
You probably know about the many tax deductions available to your business, such as:
- Operating costs such as office rent, advertising, and supplies
- Meal and entertainment costs
- Auto expenses
And if your small business is operated out of your home, don’t forget you can deduct a portion of property taxes, house insurance, utilities, and mortgage interest.
These are all tax deductions that small business owners should know about. But did you know that intangible assets—such as goodwill, trademarks, some patents, and even uncollectible invoices—can be written off, too? Don’t overlook these deductions!
Mistake #2: Missing tax filing deadlines, or not filing at all
As shocking as it may sound, small business owners often do not file a tax return or file after the deadline during tax time. Apart from receiving unwanted attention or red flags from the CRA, here are some reasons why you should be filing on time:
- Financial Benefits. By not filing a tax return, you’re losing out on some major financial benefits, such as the GST / HST tax credit and the Child Tax Benefit programs—both of which are based on your declared net income.
- Registered Retirement Savings Plan. Many individuals are contributing to their retirement, but did you know that your tax return creates the contribution room in your RRSP?
- Late Penalties. If you tend to forget to file your tax return (or file it late) you are likely to pay late-filing penalties, which means more dollars out of your pocket! And nobody likes penalties, right? And don’t forget, even though the self-employed tax filing deadline is extended to June 15, you want to get a head start, as on April 30 the CRA starts charging interest on taxes owed.
Mistake #3: Forgetting to give credit where credit is due
Did you know that your small business is eligible for tax credits? You can claim these tax credits for GST / HST paid on goods and services used in making taxable and zero-rated supplies. If you currently run a small business, or are self-employed of some sort, you can also claim:
- Canada Pension Plan. Did you know that you can claim CPP contribution payable on your income? The CPP provides contributors and their families partial replacement of earnings in the case of retirement, disability or death.
- Investment Tax Credits. ITCs help to reduce the amount of tax you have to pay—dependent on whether your business is a corporation, sole proprietorship or partnership. Looking to claim ITCs? Simply complete Form T2038 (IND): Investment Tax Credit (individuals) and then claim the appropriate amount on Line 412 of your T1 Income Tax Form.
Forgetting these simple—and often overlooked—tax credits means that you’re missing out on money in your pocket!
Mistake #4: Mixing personal vs. business finances
Let’s say you’re at Costco and you’re picking up some groceries, but last minute, you decide to grab some office supplies too. In the heat of the moment, you’ll not likely going to pull out one credit card for fruits and milk and another for paper and printer ink, right? But maybe you should.
Mixing personal and business finances can lead to missed deductions (aka dollars leaving your pocket!). You could overlook a legitimate business expense or claim a personal expense as a business deduction. Either way, it’s a good idea to keep these two separate.
Mistake #5: Neglect making tax-savvy investments
While most people already know the advantages of investing in TFSAs and RRSPs, many aren’t aware of the timing of the triggering of capital gains and capital losses of your unsheltered investments, which can be used to reduce your overall tax burden. For example, you can deduct interest costs on money that you borrow to earn business income. Even the investment you make in your home mortgage can be made into a tax deduction.
Mistake #6: Not letting your family help your tax situation
It’s never easy running a small business—sometimes it can feel like a constant uphill battle, but often times than not, the results are rewarding. That’s why the support and understanding of your family will likely be the backbone of your success. So, did you know that your family can help lower your tax burden? If your family members work for your business (and you pay them a salary) you can reduce your overall family tax burden. Other options to improve your tax situation include:
- Income-Splitting. Split your income with your spouse by investing in a spousal RRSP. This way, you can split up the 50% pension income with your partner and make loaning money to your spouse (or child) for investment purposes that much easier.
- RESP. Invest in your children’s education through an RESP and you can earn a government grant of up to $500 each year.