6 smart tax deductions to save small firms big bucks

Broadband connection, cell phone contracts and software-as-a-service (SaaS) subscriptions are just some of the items Canadian home-based business operators can claim deductions on when they file their income taxes.

There are dozens of write offs busy small business owners fail to take advantage each year, according to Geoff Morgan, communications manager for Intuit Canada, makers of tax preparation software QuickTax.

That’s either because of they are ill-prepared for the tax season or are just don’t have the right information.

“Rules around what is tax deductable may be complicated, but generally if the purchase or expense was for the purpose of obtaining income it’s tax deductible,” Morgan told ITBusiness.ca.

For many owners of small or home-based firms the issue is often more complex because personal and household expenses are often intertwined with those of their business, Morgan points out.

For instance, the family car may double as a delivery van or the home broadband connection is also the firm’s online conduit.

“Calculating which part of the expense belongs to the business is often tricky without the help of a tax advisor or tax software,” Morgan said.

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While Canadians see tax refunds as a great opportunity, many lack an effective strategy to benefit from them, according to Malcolm Campbell, vice-president and general manager of Montreal-based Dr. Tax Software Inc., makers of UFile personal tax software.

“As many as 28 per cent of Canadians do not have a strategy for dealing with their finances,” Campbell said, citing numbers from their 2009 survey on Canadian tax payers.

Finding hidden deductions

For cash strapped SMBs or struggling start-ups tax deductions could be an untapped goldmine that could be used to pay down company debt, purchase supplies or provide salary for employees. The trick is in knowing where to find the deduction.

Peter Budreski, chartered accountant and consultant to SMB owners cautioned against “trying to go it alone.”

“Chartered accountants or certified general accountants can give you proper advice. They have studied and prepared for new tax laws and developments such as the transition to the HST (harmonized sales tax).”

Another option, Budreski said, is to use one of the tax preparation software products in the market with features designed to pinpoint tax deductions.

For example, Intuit’s QuickTax offers tax payers tips on how to optimize their return and receive the highest refunds.

The product’s online or downloadable versions of QuickTax identify every available deduction, based on the latest tax rules and regulations, according to Morgan of Intuit.

The software will ask users step-by-step personalized questions such as: Do you use your car for your business? How many hours or how many kilometers a day is the car used for business purposes?

“Based on the user’s answer, the software will calculate how much the user’s business deduction will be,” Morgan said.UFile’s “MaxBack refund analyzer” uses a professional tax engine to help customers pay the least tax possible, according to Joanne Birch, vice-president for marketing at Dr. Tax.

Six money saving tax deductions

Here are six tax deductible expenses you shouldn’t miss:

1) SR&D – The federal government thinks that research and development is not only good for Canadian business in general but individual business as well. One of the government’s best programs in this area is the Science Research and Experimental Development (SR&D) Tax Credit Program.

Generally, a Canadian-controlled private corporation can earn an investment tax credit (ITC) of 35 per cent up to the first $2 million of qualified expenditures for SR&ED carried out in Canada, and 20 per cent on any excess amount. Other Canadian corporations, proprietorships, partnerships, and trusts can earn an ITC of 20 per cent of qualified expenditures for SR&ED carried out in Canada. This is a refundable tax credit, which means that even if your business does not make a profit, you will get the appropriate refund back in cash.

For more information on the SR&D, read ITBusiness.ca’s story on: How Canadian firms can claim SR&ED tax credits for software development

2) Office expenses – Pens, paper, software products, computers and printers fall under the rules of Capital Cost Allowance. Because depreciable assets wear out over time, you can only claim a portion of their original cost as a tax deduction each year. Keep in mind that Revenue Canada divides depreciable assets into different classes with different percentage rates of Capital Cost Allowance (CCA)

Tip, you don’t have to claim CCA in the year that it occurs. Rolling your CCA forward may lower your taxes later when you can use it to offset a higher income.

3) Mortgage interest and property payments – You can claim your mortgage interest as a deductible if you are running a home based business. If you are renting, you can deduct part of the rent. You can only deduct a portion of these expenses dependent on how much of your living space and time is actually devoted to business use.

Generally you can deduct expenses under the business-use-of-home expenses rule if:

  • The work space is your principal place or business
  • You use the space only to earn your business income and you use it on a regular and ongoing basis

4) Other business-use-of-home expenses – Apart from mortgage interest, property taxes and rent there are other expenses that come under the business-use-of-home rule. Here is a partial list:

  • Heat
  • Lights
  • Water
  • Maintenance and cleaning materials
  • Telephone
  • Internet connection

As with mortgage interest and rent, you can only deduct the portion of these expenses that is related to your business. Claims must also be backed-up by sales invoices, receipts or other documents.

5) Auto expenses – Even if you are using your personal vehicle for your business, you can still claim as a deductible many of the expenses associated with running and maintaining the vehicle.

Items include, fuel, oil, licensing, insurance, maintenance and repairs. There is a limit though on the amount of interest you can deduct on funds you borrow to buy a vehicle.

6) Insurance – All regular commercial insurance premiums you incur of any building, machinery and equipment used for your business is tax deductible.

Remember, home-based business insurance is commercial in nature and separate from home insurance. If you are running a business from your home, it might be a good idea to get a home-based business insurance to make sure your home is adequately covered.

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