When is the best time to claim a deductible on that new computer you purchased for your business? Will hiring a family member bring down your taxable income? How can paying out dividends to your children generate a tax refund?
The June 15 tax deadline for self-employed individuals will be here faster than you realize, but your small business might still have some time to employ these last minute tax tips from tax business planners and tax software experts.
With the pressure of tight budgets and increasing costs, it’s understandable that may small business owners to maximize tax deductions and seek out refunds but many do so in a reckless fashion that could mean trouble for the company, according to tax expert.
“It’s very normal to chase after available deductions, but it has to be done properly and with the accurate records to back up each claim,” said Bruce Ball, a certified accountant and national tax partner at BDO Dunwoody LLP, an accounting and business consultancy and planning firm.
“Some businesses claim far too much or claim for the wrong items. This raises some red flags with the CRA (Canada Revenue Agency),” he warned.
Esther Friedberg Karp, a certified Intuit Pro advisor and vice president of Certified Software Labs, a company that tests software for QuickBooks integration, agrees.
“Look towards getting every penny of deduction but don’t be overly aggressive because you could end up being audited,” she warned.
Both experts advised that business owners should carefully study what items the CRA allows for them to claim and consult with their accountants and tax preparers.
Here are some sources of tax deductions and other tips the two had to offer:
Purchase of capital assets – Are you planning to purchase a computer, server of other piece of capital asset in the near future? Ball of BDO suggests you consider doing so before the end of your fiscal year.
“It you buy the asset and use it before year-end, you can claim one-half the usual CCA rate,” he said. The CCA is a means by which Canadians may claim depreciation expense on tech products they have purchased for their business.
Related story – Get 100 per cent tax write-off on computer purchases
Even if you’re in a loss position this year, purchasing the asset now will allow a full year’s CCA claim next year. Bear in mind that title to the asset must be acquired and it must be available for use in order to claim CCA, Ball said.
Also, under a change introduced in the 2009 federal budget, a temporary increase in the CCA rate, from 55 per cent to 100 per cent, is available for eligible computers and software acquired after January 27, 2009 and before February 2011. Eligible computers and systems software acquired by a taxpayer will have to be new computer equipment and software described in Class 50 for use in and for the purpose of earning income in Canada.
Depreciation cost on property – You can also deduct a percentage of a property such as a vehicle or equipment that you use for your business, according to Frieberg Karp. “Rather than claiming for the full cost, business owners can spread out the claim over several years of the equipment’s serviceable life.”
This way, she said, the deductions can cover for periods when the business has a higher income and needs more deductible items to bring down tax payments.
Follow this like to see the CRA’s classes of depreciable properties.
Pay your family members a salary – If your spouse or employable-aged children work for you, pay them salaries to reduce your taxable income.
A bonus of this strategy is that it will also enable family members to earn income for RRSP contributions. The salary must be reasonable for the services rendered. A good rule of thumb is to pay relatives what you would have paid a third party to do the job.
Make sure that withholdings for income tax, Canada/Quebec Pension Plans (CPP/QPP), Employment Insurance and any applicable provincial taxes are remitted.
Pay your family members dividends – In certain cases, a corporation can be used for income splitting purposes, according to Ball.
For instance, if your spouse or children, who are 18 years of age and older, subscribe for shares of your corporation at fair market value using their own funds, they can receive dividends from the corporation out of its after-tax profits and you can split income, he said.
“Dividends paid by the corporation before its year-end could generate a tax refund on its corporate tax return, if it has previously earned investment income on which it paid tax,” said Ball.
If your corporation has a year-end early in 2011, say January 31st, you could declare a dividend in January, which would generate a tax refund for the corporation on its current return. The recipients of the dividend would then be taxable on their 2011 returns which are due April 30, 2012.
Deducting utilities, mortgage and property taxes – If you operate a home-based business, according to Frieberg Karp, there is some latitude for you to claim part of the expenses.
“You can’t claim 100 per cent. But CRA has a formula whereby you can deduct part of the expenses that can reasonably attributed to your business,” she said.
The amount may not big, but taken together with other deductions, this could alleviate your tax pains, she said.
Keeping accurate records
The key, Frieberg Karp said, is in keeping accurate and pertinent records. This could be done manually, but she uses a software tools such as Quicken finance software and QuickBooks software.
“I make sure all my bills are in order and then I enter the figures into my Quicken which helps me track which bills are due for payment and which accounts need to be collected,” she said.
Automation and reduced errors are big drivers for using financial software, according to Beatrice Tam, marketing manager, global small business at QuickBooks. She said users of QuickBooks are taken through an “interview process” where they key in relevant information about their business which will be used in calculating their claim.
“Tax software such as QuickBooks are regularly updated on new tax rules so when users enter the business info they can automatically apply current and applicable deductions and refunds,” she said.
Friendberg Karp said when she uses her software, each entry can be tagged with labels corresponding to the actual hard copy document so that if an audit is called.
Quicken files, Friedberg Karp said, can easily be ported to QuickBooks software. She uses the software to prepare her tax files. “I use QuickBooks because this contains the up-to-date tax laws and rules that apply for the taxation year.”