A Guide To Tax Season For Small Business Owners

A Guide To Tax Season For Small Business Owners

It’s that time of year again – everyone is talking taxes and it’s at the top of your mind even though you’ve been trying to avoid it all year. Besides just getting your taxes filed to avoid scary calls from the CRA and those hefty penalties and interest – tax season is a great opportunity to get a clear picture of your company’s financial health.

Money is the bloodline of your business so it’s important to have a finger on the pulse of your finances and not be afraid of it.

To make it just a little easier for you and in hopes that you can use tax season as an opportunity to understand where all your hard earned money is going, here is a guide with some quick tips and helpful information that might make this season a little easier and more informative for you!

Get Your Financial Books in Order

If you’re one of those people who have meticulously organized and tracked your business finances (i.e. income and expenses) throughout the year then you’re ahead of the game.

However, if you’ve been putting off dealing with your business finances all year, then now is the time to sit down and get organized!

If you’re a sole proprietor, using a tool like Microsoft Excel is a cost-effective and simple tool to track all your income and expenses. Alternatively, a more robust option is to use cloud-based accounting software such as Xero. There are other great cloud-based solutions such as Receipt Bank or Hubdoc that can really help you get your receipts and invoices organized. These are also great tools to store all your supporting documents, in the event of a CRA audit/review. You wouldn’t want to pass over receipts that have completely faded, in which case, they might disallow your expenses!

If you just don’t have the time to get your books in order and you have room in your budget, consider hiring a qualified bookkeeper to help you. Having clean and organized books will also help reduce your cost to file taxes (if you’re paying an accountant to file for you).

Pro Tip: Keep your detailed and itemized receipts for everything! Bank statements do not count as supporting documents for expense claims.

Don’t Miss The Deadlines for Filing Income Tax Returns

Small businesses that are operating as a sole proprietorship or partnership will have until June 15th to file their taxes. However, it’s important to note that any income taxes owing are due by April 30th. If you file late and end up owing taxes, you’ll pay interest and penalties on your outstanding tax balance until you submit your payment to the CRA. Keep your money in your pockets!

Small Business Tax Myths

1. My business did not make any money so I don’t need to report anything on my tax return.

False. Even if you had a net loss for the year (i.e. more expenses than income), you are still required to report your business income and expenses on your tax return. Moreover, it’s actually beneficial for you to report that net loss as you can apply the loss to other sources of income, such as employment income or investment income. If you can’t use those business losses in the current year, you can carry them back for three years and recover taxes previously paid or carry them forward for 20 years, to offset future earnings.

2. I made less than a thousand dollars and it’s just a hobby so I don’t have to report that income.

False. Even if you only made $10, you are required to report that income to the CRA. The CRA does not determine what is and what isn’t a business by how much money you make or by your intentions to “run a business”. They define a business as “any activity that you do for profit”.

Review the Financial Health of Your Business

Once your business finances are in order after filing your taxes, this is a great time for you to review the financial health of your business, see how you performed in the past year, and set financial goals for the year ahead. Did you make money or did you spend way more than you brought in? Was there an area where you spent way more than you expected? Where can you streamline costs and cutback on expenses?

Most business owners think that racking up tax deductions is great as it reduces your taxable income. However, you are still running a business and the goal is that your business will make money. Reducing unnecessary expenses also means there is more cash in your pockets and less outflow of money. Paying taxes is not a bad thing. It means that you are running a profitable business!

Consider this:

Scenario 1 –

  • If you made $1000 of income and spent $500 on expenses. You will only get taxed on $500. The taxes you would have to pay to the CRA would be approximately $125.
  • Amount of money left in your pocket at the end of the year = $375 ($1000 of  income minus $500 of expenses and $125 of taxes).

Scenario 2 –

  • However, if you made $1000 of income and spent only $200 on expenses. You will get taxed on $800. The taxes you would have to pay to the CRA would be approximately $200.
  • Amount of money left in your pocket at the end of the year = $600 ($1000 of  income minus $200 of expenses and $200 of taxes).
  • You are still better off at the end of the year, if you managed your expenses and spent less money on things just for the sake of a “tax write off”.
E-commerce – Tax Essentials

E-commerce – Tax Essentials

Many businesses operate using the Internet. Doing business like this is also called e-commerce. This page contains information on e-commerce and on reporting requirements for doing business on the Internet. There is also information on capital cost allowance for computer software and website development costs.

About e-commerce

E-commerce is the delivery of information, products, services or payments by telephone, computer or other automated media. This definition includes the many kinds of business activities that are being conducted electronically. However, e-commerce is much more comprehensive than just purchasing goods and services electronically.

E-commerce can also include retail transactions that take place by:

  • telephone
  • fax
  • automated banking machine
  • credit card
  • debit card
  • television shopping
  • secure private computer networks through electronic data interchange
  • the delivery of government services
  • business that is handled over the Internet

Reporting Internet business activities

All existing tax laws that apply to businesses also apply to business conducted over the Internet. If you earn income from one or more webpages or websites, you may need to report the web addresses and the income they earn. Depending on your business structure, you have different reporting requirements.

Webpages and websites to report

Indicate your webpages or websites that generate income. If you have more than five webpages or websites, specify the top five income generators. If they do not generate income, such as telephone directory websites and information-only webpages, you do not need to report them. Examples of webpages or websites that you should include are:

  • webpages and websites that allow the completing and submitting of an order form, the checking-out of a shopping cart or similar transactions
  • online marketplace websites where your goods or services are sold
  • webpages and websites hosted outside of Canada
  • advertisements, programs or traffic to your site that generate income

Report the gross income received from all of your Internet business activities as a percentage of your total gross income. If you cannot determine the exact percentage, give a reasonable estimate. See the headings below for how to report it depending on your business structure.

Corporations

If your corporation earns income from one or more webpages or websites, you are required to file Schedule 88, Internet Business Activities, along with your corporation income tax return (T2) for tax years where your filing due date is after December 31, 2014.

Partnerships

If your partnership earns income from one or more webpages or websites, currently you do not have to report Internet income information separately.

Self-employed individuals

If you earn income from one or more webpages or websites, complete the Internet business activities section of the following forms that apply to you, along with your general income tax and benefit package (T1):

Capital cost allowance – computer software and website development costs

In general, computer software or website development costs are either:

  • current and deductible in the year they are incurred
  • capital and deductible under the rules in the Income Tax Act for capital cost allowance

For more information on general principles for capital cost allowance, see Income Tax Folio S3-F4-C1, General Discussion of Capital Cost Allowance.

If it is computer software that is a depreciable asset, include it Class 12. If it is system software, include it in Class 8, 10, 29 or 40.

“Computer software” includes system software and a right or a license to use computer software.

“Systems software” refers to the general operating system that enables running the application of programs, directs and coordinates the different operations of the computer. This includes all of the input and output between the keyboard, the computer screen, the printer, the disk drives and other peripheral equipment.

Generally, software is considered depreciable if it is of an enduring nature, which generally means that its useful life is anticipated to be beyond one year.

There are no specific provisions in the Act regarding the treatment of website development costs but some of the principles in the Income Tax Folio S3-F4-C1 can apply to website development costs.

Whether a website development cost is current or capital is always a question of fact.

If a website development cost is a capital cost it may be for the acquisition of “general purpose electronic data processing equipment” and therefore included in Class 10(f) or it may be for the acquisition of computer software and therefore included in Class 12(o).