Three Tips to Lower Your Small Business Tax Bill

by Craig Anthony

2 min read

Managing expenses sits squarely in the sights of any organization. As the months pass, it’s important for small business owners to be mindful of ways to reduce year-end tax bills. There are a number of methods you can use to reduce the Canada Revenue Agency’s share of your revenues. Some strategies require periodic tracking throughout the fiscal year. In contrast, others focus on the big picture, looking back to gauge when offsets should apply. Depending on results, you may want to use certain deductions in the year incurred or apply them to past or future years when business income is greater. The following tips will help lessen taxes paid to the Canada Revenue Agency when T1 and T2 forms are due.

Registered Retirement Savings Plans

A good year in business may have you wondering what to do with the proceeds. There are two possible options — spend or save. A [Registered Retirement Savings Plan (RRSP)] (https://www.thebalance.com/rrsps-tax-deduction-for-canadian-small-businesses-2947302) allows Canadian business owners to reduce taxable income by investing dollars that are sheltered from taxes, as is any interest earned on those contributions. Furthermore, RRSP investments could reduce your tax bracket, saving additional dollars from the reach of the Canada Revenue Agency. Be aware of contribution limits when considering how much money to place in an RRSP. In years when income is high, carry forward privileges allow you to make larger annual deposits to these accounts. This is possible if you hadn’t taken the full deduction (the lesser of $24,930 or 18% of 2015 gross income) in the prior year.

Claiming Daily Business Expenses

To accurately deduct day-to-day business expenses incurred, it’s important to establish a system. Rather than chase receipts at year-end, take time weekly to enter costs from business meals, entertainment, and mileage. While these expenses may seem insignificant on an individual level, they add up to considerable tax savings on an aggregate basis. The $25 weekly client lunch doesn’t seem like much until you add up total dollars spent over 50 weeks. Using accounting software, such as QuickBooks Online, is a great way to easily track these expenses with little time and minimal effort. In addition, using digital receipt software integrates simply with accounting software, allowing emailed and scanned receipts to be recalled and entered when needed.

Home-Based Business Deductions

If you operate a business out of your home, consider all the possibilities for tax deductions that apply to home-based sole proprietors. To qualify for these deductions, your home must be the main location from which you operate. The occasional telecommuting day away from an outside office does not make your operation eligible for home-based expense exemptions. If you do qualify, expense such as utilities and mortgage interest can be used in part to reduce taxable income. A simple method for knowing [what percentage of expenses to deduct] (https://www.thebalance.com/how-to-calculate-the-home-business-tax-deduction-2947097) involves calculating the amount of space your home office occupies. If you own a 2,000 square foot home and allocate 200 square feet to business pursuits, 10% (200/2,000) of home expense can be deducted from taxable income.

References & Resources

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