Deductible expenses & record keeping


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This is the final module in the Canadian Small Business Course.

In this module we analyze some of the most frequently asked questions related to areas such as vehicle expenses and home office expenses. Also reviewed are a host of other common small business expense.

Record keeping and tips to maintaining proper records are also reviewed with an emphasis on keeping CRA tax auditors of your back.

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Deductible expenses & record keeping

  1. 1. MODULE 5<br />Deductible Expenses & Record Keeping<br />
  2. 2. FREQUENTLY ASKED QUESTIONS<br />What am I allowed to deduct?<br />How should I keep track of expenses<br />
  3. 3. FREQUENTLY ASKED QUESTIONS<br />Automobile Expenses<br />Should I buy or lease a vehicle in the company name or personally?<br />Should I buy or lease the vehicle? What’s better for tax purposes?<br />How should I pay my vehicle expenses?<br />Do I have to keep a kilometer log?<br />
  4. 4. FREQUENTLY ASKED QUESTIONS<br />Home Office Expenses<br />Am I allowed to write off any home office expenses?<br />If so, what expenses are deductible and how much?<br />How do I keep track of the expenses?<br />
  5. 5. FREQUENTLY ASKED QUESTIONS<br />Travel Expenses<br />Can I write off any of my trips?<br />What about meals and entertaining clients? Can I do anything with those?<br />
  6. 6. AUTO EXPENSES<br />Deductibility and how to deduct will depend on a number of factors<br />Proprietorship, partnership or corporation<br />Who owns the vehicle – company or personal<br />Lease or purchased<br />
  7. 7. Who owns the vehicle?<br />Lease or purchased<br />Type of business organization<br />
  8. 8. AUTO – PROPRIETORSHIP<br />Gas and oil<br />Repairs and maintenance <br />Insurance<br />Lease costs or depreciation<br />License fees <br />Business use: You can only write off the proportion of expenses used for business purposes<br />
  9. 9. CORPORATE AUTO <br />Question<br /> Should I buy personally or under the corporation name?<br />What kind of vehicle is it?<br />What is the business-use vs. personal use? <br />
  10. 10. CORP AUTO - OPTIONS <br />Rules of Thumb<br /> Substantial personal element?<br /> Personal and Charge corporation<br /> Purely business use?<br /> Company name and write off all expenses <br />
  11. 11. CORP AUTO – CAUTION! <br />Potential Pitfall<br /> Company asset, but substantial personal use?<br />You will be charged a taxable benefit for using a corporation asset for personal use<br />Composed of the standby charge and operating cost benefit<br />
  12. 12. CORPORATE OWNED<br />Different rules and be aware of adverse tax consequences<br />Only beneficial for primary business use vehicles<br />Capitalized – company assets (put on books) and depreciate<br />Taxable benefit– used for personal use <br />Standby charge<br />Operating cost benefit<br />
  13. 13. STANDBY CHARGE<br />OWND BY THE CORPORATION<br />2% x cost of automobile x # of months available to the employee in the year<br />LEASED BY THE CORPORATION<br />2/3 x monthly lease costs (excluding insurance) x # of months available to the employee in the year.<br />
  14. 14. STANDBY CHARGE REDUCTION<br />Can reduce the benefit if:<br />the business use of the automobile is more than 50%<br />the total personal use kilometers is less than 20,004 kms per year (1,667 km per month)<br />Less: and reimbursements by the employee to the employer (i.e. or the owner-manager back to the company)<br />
  15. 15. KILOMETRE LOG<br />To avoid problems on audit, an accurate kilometre log should be maintained<br />Know what is business and what is personal<br />What if I don’t keep a log?<br />There will be more scrutiny by the CRA auditor and it will be challenged<br />
  16. 16. KEEPING RECORDS<br />Maintain a kilometre log<br />Keep all gas receipts, repair bills, insurance policies<br />Have some proof of payment (credit card statement)<br />Company policy – use one credit card for all your business expenses, including vehicle<br />Reasonability and make sense<br />
  17. 17. BUY VS. LEASE<br />Should I buy or lease my car – What is better for me tax-wise?<br />Tax implications – there is not a significant difference (either write off lease payments or take CCA on the vehicle)<br />If charging company based on prescribed rates then it won’t matter<br />
  18. 18. HOME OFFICE EXPENSES<br />Can only deduct (as a proprietorship) if:<br />Predominant place where you meet clients<br />Primary place where you operate your business<br />Determine expenses, then multiply by % of total square feet used for business<br />For proprietor, cannot use home office expenses to create or increase a loss – carryforward unused<br />
  19. 19. HOME OFFICE - CORPORATION<br />Step 1: Determine the monthly amount that will cover the business proportion<br />Step 2: As part of your expense reports, reimburse yourself for these expenses<br />Step 3: At the end of the year, declare the rental income with the proportionate expense on your tax return<br />
  20. 20. OTHER EXPENSES<br />Travel Expense – be aware of the personal element and do some due diligence in writing-off<br />Meals & Entertainment – Keep receipts, write down who you entertained, again due diligence on any personal component<br />Clothing & Grooming – non-deductible in all cases unless specific to the job and not personal in nature<br />
  21. 21. PERSONAL EXPENSES<br />PROPRIETORSHIP<br />Auditor will disallow the expense<br />Interest will be charged on any tax assessed on the non-deductible expenses<br />
  22. 22. PERSONAL EXPENSES<br />CORPORATIONS<br />Rules are more harsh<br />Corporation will not be allowed deduction with the related interest charged<br />Shareholder benefit will be assessed under 15(2) for using corporate assets for personal use – taxable personal benefit<br />
  23. 23. Canadian Small Business Course<br /> <br />Visit us online and take the Canadian Small Business Course for the in-depth video tutorials related to this presentation <br />
  24. 24. Canadian Small Business Course<br /> <br />Or take individual modules such as this presentation:<br />Module 1: Forms of business organization<br />Module 2: Starting a business step-by-step<br />Module 3: Compensation strategies<br />Module 4: Tax planning and strategies<br />Module 5: Expenses and deductions <br />