Tax season can be a challenging time for small business owners and is something that most dread every year. Accountwell Co is a boutique accounting firm based in Calgary, AB specializing in services for entrepreneurs, start-ups, and small businesses. We asked Joanna, the founder and Partner of Accountwell Co, for tips and strategies that small business owners can implement around tax season as well as the rest of the year. We’re so thankful that she took the time to create this ‘guide to tax season for small business owners’ and share her knowledge and experience with the Shop Local CANADA community. Enjoy and happy tax season!
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!
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”.