Deductible Expenses for Self Employed/Small Business owners
Hello All,
The question that almost every self employed/small business owner wants to know, especially at this time of year , is what expenses can I deduct to lower how much I owe in tax. This newsletter is not going to reveal anything groundbreaking, but hopefully it is a useful reminder for expenses that you might have overlooked.
First, lets start by looking at what a self employed/business expense is. As defined by Revenue Canada it is “a cost you incur for the sole purpose of earning business income.”
This means that as a small business owner, you can reduce your profit and corresponding taxes payable by claiming expenses that relate to your business. Of course like with all things tax , there are various degrees of complexity around the expenses that you can claim.
The most important piece of advice that I give to my clients and newsletters peeps with respect to expenses is to be reasonable. You want to put yourself in the mindset of the revenue agencies who check amounts that fall outside of the norm. There will be a range for what is normal based on your revenues earned and the industry that you are in. Anything outside of this range is likely to be flagged. If it is flagged, then CRA, who follow a risk based approach, are going to determine if it is worth their time to audit. Keep in mind that an audit can simply be a written request for details so it doesn’t take too much in terms of their resources.
The most common business expenses that can be deducted include :
Wages/Salaries which should match your payroll reports
Payments to subcontractors for which you should have invoices
Direct costs of making your product or providing your service which can be materials, shipping, packaging or technology specific to your service
Advertising expenses which includes marketing, gifts to clients, web hosting, trade shows etc.
Bank charges including credit card fees that you pay for accepting credit cards, interest on loans/business credit cards, annual fees on credit cards etc.
Subscriptions for software, apps, publications that relate directly to your business
Home office expenses representing the % of expenses relating to your home that are exclusively used as a home office (e.g. mortgage interest or rent, utilities, property taxes, insurance etc.)
Car expenses including gas, registration, parking, repairs and lease or financing expenses. Plus depreciation (capital cost allowance) if you own the car.
Fees paid to your accountant or lawyer
Telephone and internet which can be claimed based on the percentage used for business
Travel to meet with clients or attend conferences as well as training expenses
Meals and entertainment claimable if it is with a business client, partner or colleague and business is discussed.
Office supplies which is a bit of catch all but includes items relating to your office.
More details on expenses can be found on the CRA website.
The second most important piece of advice that I give is to have a separate bank and credit card for your business. This is especially useful when you are compiling your expenses as you know where to find most of your transactions. To put some perspective on it: if your marginal tax rate is 40% and you forget to include an expense of $100, you are paying $40 extra in taxes. Of course, many business owners don’t have separate bank accounts. In this case I strongly recommend having a process whereby all business expenses are noted on a spreadsheet or document during the year so that it isn’t overlooked.
Finally, it is essential to have source receipts/bills/invoices for all of your expenses. In most cases, the charge on the bank or credit card statement won’t be sufficient in case of an audit.
Every business owner should deduct the expenses that are required to run their businesses and therefore to which they are entitled. When in doubt about an expense, it can useful to think about how comfortable you would be in the event that you have to justify it in front of a CRA auditor.
Want to learn More About Maximizing your tax deductions?
Check out my on-demand masterclass Small Business Guide to Maximizing Tax Deductions. You’ll learn what you can write off, how to stay organized, and how to avoid common mistakes—designed for Canadian solopreneurs and small business owners.
