Tax Deductions Every Entrepreneur Must Know

At the start of any business venture, a business owner’s main focus is to ensure the continuance and growth of their venture. This could lead to tighter cash management in order to strive in this novel setting. In this context, write-offs of certain business expenses would allow material savings and better use of those savings to invest in growth.

For a non-incorporated venture, i.e. a self-employed individual, significant write-offs are available. Expenses not only to make the business operational but also to maintain it and keep it running could be used by entrepreneurs to lighten their tax burden, provided that the following core principles are respected.

Core Principles For Tax Deductions

First, the expense must be incurred (i.e. paid or will be paid) for the purpose of earning income. As such, any personal expenses that are not related to the business could not be deducted. Similarly, the expense can not be on account of capital or depreciation unless specified in the Regulations.

Second, it has to be reasonable. This qualification is more subjective and is based on the circumstances in which the expense has been incurred. The reasonability of an expense is not based on the outcome. Hence, the expense could still be reasonable despite poor business judgment. Furthermore, it does not matter whether the expenses exceed revenues, and the business has a loss. The real question is whether a person of business would have paid such an amount in the circumstances of this specific taxpayer. If the answer is yes, then the amount is reasonable. Third, in general, the expense incurred in the taxation year must be claimed against income earned in the same year. Fourth, it has to be supported by appropriate documentation such as invoices and detailed calculations.

Common Expenses to Consider

Once the above criteria are met, a business expense can be deducted. Here are some common expenses that entrepreneurs need to consider:

Business use of home expenses:

This one is fairly useful as a significant number of services are provided remotely. In order to be eligible for this deduction, one of the following conditions should be met:

The home is the principal place of business.

An allocated space is used only to earn this business income, and it is used on a regular and ongoing basis to meet clients.

If this is the case, and part of the home is used for business and personal living, at-home expenses can be deducted on a reasonable basis. For example, it could be deducted proportionally to the area of workspace in the total area of the home. Examples of expenses that could be deducted include heat, electricity, insurance, maintenance, mortgage interest or rent, property taxes and utilities. However, it is important to mention that the business use of home expenses can not be used to create a business loss.

Motor vehicle expenses:

Similarly to business use of home expenses, fuel, car insurance and maintenance costs could be deducted, proportionally to the use of the vehicle for business purposes.

Business taxes, fees, licenses and dues:

Any annual license fees used to keep running your business as well as business taxes could be deducted. Furthermore, annual dues or fees to keep memberships in a trade or commercial association as well as subscriptions and publications are deductible.

Meals and entertainment:

Only 50% of expenses incurred for food, beverage and entertainment incurred for a current or prospective client are deductible. However, provided that it is incurred in the appropriate period, and it is reasonable, different types of expenses could fall into this category such as cost of tickets to the performing arts and athletic events (except golfing fees). Furthermore, if meals and entrainment expenses are incurred for employee events, those expenses are 100% deductible up to a maximum of six events per year.

Capital cost allowance:

This is a specific provision allowing the deduction of the cost of assets such as buildings, furniture and equipment used in the business venture over a period of several years.

Interest expense:

Interest incurred on funds borrowed for business purposes or to acquire property for business purposes are deductible.

Business start-up costs:

Expenses related to the start of the business can be deducted in the first year of the business. It is crucial to determine the date at which the business started as only expenses that are incurred at that moment and ongoing are deductible.

Professional fees:

Expenses incurred for accounting and legal fees to get advice, keep records and prepare and file income tax and GST/HST returns are deductible. Furthermore, fees incurred for external professional advice or service such as consulting fees, also give rise to a deduction.

On the road to entrepreneurship, the knowledge of business expenses that could be deductible could help a business owner minimize the tax burden of his venture and maximize its cash flow. Accountero provides efficient tax advisory services that enable entrepreneurs to concentrate on growing their businesses while expanding their tax deductions.

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