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Tax is the biggest expense for most small businesses. Yet most small businesses don’t have a plan to reduce the amount of taxes that they pay. To stay competitive and profitable, it’s imperative that your small business reduce its tax expense.
Below, I’ll share the 10 Best Tax Tips that your small business should implement:
1. Income Splitting with Your Spouse
Consider paying your spouse a salary of the work that he/she performs in your small business. The amount of salary paid must be reasonable in relation to the hours worked and type of work. For example, it would be unreasonable to pay your spouse $100 per hour for 8 hours a day, when your spouse only works 3 hours a day in an administrative capacity.
By income splitting with your spouse, the overall taxes paid will be reduced.
2. Dividend Sprinkling – by Accountant in Mississauga
As an Accountant in Mississauga, I recommend that you pay dividends to your family members who over the age of 18. The first $38,000 (approximately) of dividends that an individual receives is completely tax-free.
Kiddie tax of 46% is applied to dividends paid from private companies to children under the age of 18, effectively defeating the purpose of income splitting with minors.
3. Home Office Expenses
As a small business owner, you can write off expenses related to your home office, if you work from home. These expenses include:
o Mortgage interest
o Condo fees
o Property taxes
o Maintenance and repairs
o Rent (if you’re renting your home)
The following formula is used to determine the portion of the home office expenses that can be deducted for tax expenses:
Expenses relating to home listed above x (Total Square Feet of Home / Square Feet of Home Office)
You should consult with your Accountant in Mississauga before deducting your home office expenses, as certain other limitations apply.
4. Tax Free Automobile Allowance
If you own an automobile for which you use for business purposes, you should have your corporation pay yourself a tax free automobile allowance. The Canada Revenue Agency (CRA) will allow a corporation to pay a tax deductible allowance of 52 cents per KM for the first 5,000KM and 46 cents per KM thereafter for kilometres driven for business purposes to an employee of an corporation to compensate him / her for use of their automobile.
The automobile allowance received by the employee is completely tax free.
5. Meals & Entertainment – by Accountant in Mississauga
Expenses that you incur for entertaining your clients are taking your clients out for lunch/dinner are 50% tax deductible. Make sure you tell your Accountant in Mississauga to keep track of those meals and entertainment receipts!
6. Business Promotion Expenses
Business promotion expenses, such as gifts to clients, marketing materials, and promotional items (e.g. company pens, calendars, etc.) are 100% tax deductible by your small business.
7. Tax Depreciation – by Accountant in Mississauga
Tax depreciation (also know as capital cost allowance) can be deducted in respect of the capital assets owned by your small business corporation. The tax depreciation permitted as a tax deduction is calculated as a % of the cost of the asset, at rates stipulated by the CRA:
o Furniture & Fixtures – 20%
o Buildings – 6%
o Computers – 100%
o Software – 100%
o General office equipment – 20%
o Manufacturing Equipment – 25% first year, 50% second year, 25% third year
You should speak with your Accountant Mississauga about maximizing your small business corporation’s tax depreciation.
8. Small Business Deduction
Small business corporations in Canada receive a special tax deduction on the first $500,000 of business profits, which effectively reduces the federal income tax rate to only 11%. Canadian provinces also have a small business deduction.
9. Any expenses incurred for business purposes
The Canadian Income Tax Act stipulates that any reasonable expense incurred for the purpose of earning income from business is tax deductible. There are certain exceptions, however, such as meal and entertainment as discussed above.
Therefore, as long as the amount of the expense is reasonable and the purpose of incurring the expenses was in relation to your business, the expense should be tax deductible.
10. Hire an Accountant!
Last, but not least, you should hire an accountant to manage the books of your small business and to provide you with valuable tax advice. The fees that you pay your Mississauga Accountant (or other accountant) will be more than offset, by the tax savings identified by your Accountant.
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