A Beginner’s Guide to Small Business Deductions
“I’ll write it off as a business expense.”
It is so satisfying to say, but any entrepreneur knows that the process behind this phrase can be a bit complex. Although tax deductions can be an economical way to run your small business to the best of its capacity, it can be a hard landscape to navigate—especially if you’ve only ever filed personal tax returns. In this article, we’ll break down the most common business expenses that entrepreneurs can claim, the way these expenses work, as well as some general dos and don’ts of tax write-offs.
What can be written off as a business expense?
In short, any expense that’s required for the purpose of running your business can be deducted as a business expense. The opposite of a business expense is a personal expense, which cannot be deducted.
Sounds simple, right? If it were, this article wouldn’t need to exist. There are many caveats to small business accounting, and they can be difficult to navigate. First, let’s go over concrete examples of typical small business deductions available to Canadian entrepreneurs.
16 common business expenses
Being aware of the specific tax write-offs pertaining to your business can help you plan and remain organized. The below list is not exhaustive but contains some of the most common operating expenses for entrepreneurs. The Government of Canada has a long, albeit still not complete, list of other costs you may encounter.
1. Bad debts
Bad debt refers to money that you’re owed and haven’t been able to collect. This usually means a service that you have provided for a client and invoiced for but have not been paid for, even with a considerable amount of time passing. For example, let’s say you run a graphic design business, and you designed a website for a client. If the client never responds to your invoice or goes out of business before paying your invoice, you may be able to claim it as bad debt come tax season.
Total amount you can claim: you can claim the full amount of bad debt you are owed. For example, if you are out $10,000, and a debt collection agency was able to collect $3,000 for you, you can claim $7,000.
2. Bills (i.e., telephone and utilities)
As a business owner, you can deduct the costs of certain bills, like electricity, water, telephone, and cable, if these expenses enable you to earn business income. However, you must only deduct the percentage of the costs related to running your business.
If your business is run from your home, you will have to calculate which percentage of your utility bills is used in your home office, and what percentage of your phone calls are related to business needs.
Total amount you can claim: you can claim whichever percentage of your bills you use for business operations. For example, if you pay $600 every month towards bills that you use to generate business income 30 per cent of the time, you can expense 30 per cent of $600, or $180 monthly.
3. Business licenses and dues
If your line of work requires you to pay membership dues or similar fees, then this can be a potential tax deduction. This includes things like a membership in a governing body or association—or even a publication subscription. However, it doesn’t include recreational memberships (such as a gym or athletic club membership).
Total amount you can claim: you can claim 100 per cent of business licenses and dues provided they are used in the operation of your business. If your license is only partially used for your business, you may only deduct that percentage of the business license.
4. Capital costs
In the government’s eyes, items such as desks, chairs, and computers are considered a capital cost. Capital costs are one-time purchases that are integral in rendering a service. Capital costs generally depreciate over the period of time that you instruct their use.
Capital costs can be factored into your small business deductions, but they must be deducted over a period of several years and not all at once.
Total amount you can claim: you can claim 50 per cent of capital costs for any given year.
5. Charitable donations
In certain cases, you may be able to put a charitable donation towards your business expenses. To be eligible, the donation must have been made through your business towards a registered Canadian charity.
Total amount you can claim: generally, up to 75 per cent of charitable donations are tax deductible.
6. Delivery fees
If you ship packages and other mailable items in your business duties, you are eligible to submit the costs associated with this as a tax deduction.
Total amount you can claim: you can deduct 100 per cent of any delivery fees related to your business that were incurred in the past year.
7. Employee salaries
Certain employee expenses, such as employee salaries, employment insurance premiums, and workers’ compensation, can be deducted. An exception to this is your own salary, which cannot be deducted.
Total amount you can claim: you can claim gross employee salaries, as well as CPP or QPP contributions, EI premiums, workers’ compensation amounts, and parental insurance plan premiums (in Quebec).
You’re eligible to claim any insurance premiums that you incur, as long as it pertains to buildings or equipment you use in the operation of your business. You may be eligible to claim home or auto insurance premiums. However, they must be declared as part of your home expenses or motor vehicle expenses, respectively. In most cases, life insurance premiums are not eligible for deduction.
Total amount you can claim: you can claim any paid insurance premiums in full.
9. Interest on business loans
As a small business owner, you are able to deduct any loan interest you have incurred over a period of time provided the loan was borrowed for business purposes.
Total amount that you can claim: 100 per cent of business loan interest as long as it was borrowed to generate business income
10. Motor vehicle expenses
Depending on the nature of your travel, you may be able to deduct some of the costs associated with operating a motor vehicle on your taxes. However, the amount you are deducting must be specific to the amount you use your motor vehicle for business purposes.
Total amount you can claim: this depends on the amount of time you spend using your motor vehicle for business use only, and whether or not you own or lease your vehicle. For example, if you are using a leased car for business 40 per ent of the time, you can deduct 40 per cent of your monthly lease payment.
11. Office expenses
Office expenses are one of the most common types of business expenses and include small items such as stationary and stamps. However, it does not include larger-scale items such as chairs or desks or even computers—as mentioned above, those are capital costs.
Total amount you can claim: you can claim 100 per cent of the cost of your office supplies, provided that they are necessary for your work and solely used for business purposes.
12. Professional fees
If you seek counsel related to the operation of your business, you can deduct the fees paid for these services from your taxes. This can include individuals such as accountants, lawyers, and other professional consultants.
Total amount you can claim: you can claim 100 per cent of professional fees that are related to your business operations.
A percentage of the amount you pay in rent for the property where your business is conducted can be put towards your tax deductions. This is true whether you rent a separate office space or conduct business within your personal living space. However, how you go about claiming this will change depending on which category you fall into.
Total amount you can claim: this is directly related to the percentage of your home used to run your business. For example, if you use 30 per cent of your home to run your business, you can deduct 30 per cent of your rent on your taxes.
14. Sales tax
Sales tax appears as GST and PST in Alberta, British Columbia, Manitoba, and the Territories, as GST and QST in Quebec, and as HST in Ontario, Prince Edward Island, Newfoundland and Labrador, Nova Scotia, and New Brunswick. Certain businesses must charge sales tax on their services. However, as a small business owner, you are eligible to receive rebates on the sales tax that you pay through something called an input tax credit (ITC).
When filing your small business taxes, it will be determined whether or not the amount of sales tax you have collected is lesser than or greater than your ITCs. If you carry a negative balance, the government will provide you with a sales tax refund.
Total amount you can claim: you can put 100 per cent of the small business taxes that you claim towards your ITC.
15. Start-up costs
When you create a business, certain miscellaneous fees are associated—new entrepreneurs know this all too well. These costs most commonly include the purchase of inventory and equipment that are vital to your business operations.
You can claim these expenses, but only if they’ve been incurred after your business’s start date. The Government of Canada specifies that you must be precise about the start date of your business operations to be eligible for tax refunds.
Total amount you can claim: you’re permitted to claim up to $5,000 in start-up costs.
16. Travel costs
If you undergo travel that’s related to your small business, you may deduct this expense. This includes transportation, hotel accommodations, as well as meals. A 50 per cent limit will apply to all food and beverage purchases made while travelling.
Total amount you can claim: 100 per cent of travel expenses, 50 per cent of food and beverage expenses.
Business expenses that are not eligible for tax write-offs
Although it would be great if small business deductions were all-encompassing, there are some common expenses that are not eligible for tax write-offs. These include:
- Your own labour that you apply to your business
- Repairs on any items that are considered capital costs
- Any repairs for non-capital costs that have already been reimbursed by your insurance company
- Costs associated with a secondary office location (only primary office location expenses can be deducted)
- Portions of any bills that are used for personal matters (even if a portion of those bills are used for business matters)
- Any business expenses, if your business is not profitable over a long period of time
- Interest that you have incurred on personal loans that were borrowed to pay overdue income taxes
How to submit business expenses during tax season
Once you have narrowed down the type of deductions that you are eligible for, it’s useful to know how to go about submitting them. To claim a small business expense, you will need to have original copies of all of your invoices. Although it is possible to process your taxes yourself, the best idea is to consult a professional such as an accountant.
Tax write-offs work by lowering the amount of your taxable income, which in turn lowers the amount of tax you owe the government. This is because the tax system works on a progressive system, which means that taxpayers pay an amount that is relative to their earnings.
Tax write-offs for small businesses: Dos and don’ts
- Keep pristine records of everything you spend. In the case of an audit, you will need to provide a reliable paper trail.
- Trust a chartered accountant with the filing of your taxes ( bonus: the cost of an accountant is in itself a business expense!)
- Be aware that you may only be able to deduct a portion of your expenses. Take internet bills, for example, while you can deduct the portion that helps you contact clients, you cannot deduct the portion that fuels your latest Netflix binge.
- Trash your receipts, even if you have already filed your taxes. Receipts should be kept for a minimum of six years in case of an audit.
- Rely on estimates when submitting expenses.
- Try to do it all yourself—don’t hesitate to enlist the help of a professional accountant.
- Feel limited if the CRA does not list a certain expense on their website. The CRA’s definition of a business expense is “any reasonable current expense you paid or will have to pay to earn business income,” so when in doubt, you can check with your accountant or with the CRA directly to see if your expense may be eligible.
Although the process of taking care of your taxes as a small business owner can be daunting, there’s help available. After all, it only takes the right information to turn an overwhelming situation into an empowering one.
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This article offers general information only and is not intended as legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. While the information presented is believed to be factual and current, its accuracy is not guaranteed and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author(s) as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or its affiliates.