Small Business Tax Deductions You Need to Know in 2018
Getting your small business off the ground is hard enough. And dealing with small business tax issues can make things even harder.
But as a small business, certain deductions are available to you, which means tax time might not be as bad as you think.
Keep reading for a breakdown of commonly missed tax deductions for small businesses, and how to use them to your benefit.
Types of Small Business Tax Deductions
Being a small business owner doesn’t just mean making your own hours – it also makes you eligible to write off certain expenses related to your business.
Starting with the CRA’s Statement of Business or Professional Activities (Form T2125) to list your applicable business expenses, you can line yourself up for a significant tax return while reducing taxable income.
While this is not an exhaustive list (just the commonly missed ones) the deductions listed here will get you off to a solid start.
The Small Business Tax Deduction
Which, really, ought to be the first one you cover. It’s like the granddaddy of small business tax deductions.
If you don’t do any other deductions, you should be doing this one. It’s one of the most beneficial tax deductions because it reduces your Part 1 tax.
Assuming, of course, that you qualify.
You have to be classed as a Canadian-controlled private corporation (CCPC) and meet the appropriate conditions under Chapter 1 of the T4012 – T2 Corporate Income Tax Guide.
Oh, and there’s a size limit based on the CCPC’s taxable capital.
Home Business Tax Deductions
Of course, for those who are using there home as their business headquarters there’s also the home business tax deduction.
Essentially, it’s a small business tax deduction for businesses who are run out of the owner’s home.
This one is more extensive than most small business owners realize. Under this deduction, you can write off a range of expenses – even interest on your mortgage.
Talk about small business benefits.
Mortgage Interest and Property Taxes
Don’t you love it when one awful thing sort of cancels out another awful thing?
Here’s the scoop — if you have a mortgage on your home, and your business meets the requirements of business-use-of-home deductions, you can claim your mortgage interest for a deduction.
Don’t get too worried.
You can generally meet the business-use-of-home requirements if:
- The workspace in your home is your primary place of business
- You use the space only for business income
- You use the space to meet clients or customers
Oh, and another fun fact — if you run a home-based business, you can also claim your property taxes as expenses.
Just, before you get too excited – you can’t deduct the full cost of your mortgage interest and property taxes. Just part of them. Sorry.
Related Business-Use-of-Home Expenses
Besides your mortgage interest and property taxes, there are other small business tax deductions that fall within the realm of home business tax deductions.
Basically, the costs related to maintaining your home can be considered business expenses. Common ones include heat, lighting, maintenance costs, internet connection, etc.
Basically, everything you would need to maintain a workable, functioning corporate office also applies to maintaining a home office.
A word of advice, though – you need to keep sales invoices to prove that your claims are valid.
Also, no double dipping. If you claimed it somewhere else in your taxes, you can’t claim it again.
Work Space in Home Expenses
Which isn’t exactly the same thing as business-use-of-home expenses. You could be forgiven for getting confused.
Think of it this way. Everyone has bad months. Like, more losses than income and even the mice in your cupboard have moved on to greener pastures type of months.
That’s what workspace in home deductions are for.
Essentially, when you have more losses than earnings in a month, you can have what the Canadian Revenue Agency refers to as unused Work Space in Home Expenses, which you can carry into the following year.
Want to know what’s even better?
As long as your business continues to meet business-use-of-home requirements, an indefinite carryover period is provided.
Basically, you can use these expenses to offset higher earnings later in the year as it’s most convenient.
Business Management Expenses
Of course, small business tax deductions aren’t limited to the home.
As a small business owner, you are able to deduct business-related management expenses including business taxes, annual fees, licenses, membership dues for professional organizations or fees for commercial or trade associations.
It doesn’t end there, of course – it also includes things like mailing, domain names, web hosting and bank charges for processing orders.
Oh, and if you sought consulting services – like, say, legal advice?
They’re also expenses you can deduct.
Money keeps your business swimming. And most small business owners know that you’re going to be putting a bit of your own money to float the bills when your getting started.
As such, you can deduct certain operating expenses like rent, heating and electrical – for businesses run out of your home, many of these types of small business tax deductions are actually quite generous.
This can also include office supplies like paper or computer software, or costs which indirectly allowed your business to continue providing rockstar service to your customers.
Where would we be without insurance premiums?
Happy days are here again because small business tax deductions include insurance premiums.
This can include business insurance – think general business liability insurance, business property insurance, and business interruption insurance – as well as home-based business insurance.
Which, if you think about it, makes a lot of sense.
Seeing as how your home-based business insurance is essentially commercial in nature, despite the fact that it’s covering you in your own home, working from the comfort of your own home.
Remember that time when you paid an arm and a leg to advertise your small business with a marketing agency that knew what they were doing?
Turns out, you can deduct those costs (with a few stipulations, of course).
You can deduct the cost of advertising on Canadian TV and radio stations and Canadian magazines and newspapers.
However — you can’t just be selling yourself.
At least 80% of the used material has to be journalistic, and advertising must not take up the majority of the space. You can still write it off if it’s below 50% journalistic, you just can’t write off nearly as much.
Remember when your mom and every person of apparently sound financial judgment told you to have a rainy day fund?
Turns out, you get a small business tax deduction for that.
According to the Canadian Revenue Agency, you can deduct an amount for a contingency fund or sinking fund (within reason, of course).
But before you start planning for that fancy bottle of wine – as a general rule, that in-case-of-disaster money has to be returned to your income the following year.
You can, however, start or claim a new reserve in the following year.
Travel (and Vehicle) Expenses
So you had to go to Florida for business.
And it…wasn’t terrible, but your bank account wasn’t necessarily that pleased with you when you first made those reservations.
Fun fact — there’s a small business tax deduction for that.
You can also claim the business portion of your vehicle expenses on your taxes.
Note the keyword — business portion. Not the cost of gas to drop the kids off at school.
These include fuel and oil (for applicable business trips), licensing and permits, supplemental insurance for business-specific purposes, maintenance and repairs, leasing costs, etc.
Pro tip: you can only deduct a portion of those expenses, but the Canadian Revenue Agency requires you to keep a record of total kilometres driven to support your claims.
Remember that client you treated to a pricey lunch?
You later landed them, and it was the start of a beautiful friendship, but man, that lunch.
Did you know that food, beverages, and entertaining expenses related to your business (within reason, don’t go nuts) are eligible for a 50% tax deduction?
This includes tickets and entrance fees, gratuities, cover charges and room suite rentals.
If it’s a staff party, that’s even better for you. Those are 100% tax deductible (up to six of them per year).
Run Your Small Business the Smart Way
Look, we know it and you know it. Running your small business in Canada is a process. It’s tiring and rewarding and it’s worth it.
That’s why we want to make it a little bit easier.
We offer a variety of resources for small businesses, including registration for sole proprietorships, general partnerships and corporations.
But if you’re in the market for quality business advice, there’s also our blog – check out our post on business finance solutions for Canadians.