Operating expenses are an essential cost of running a business. Without them, there would be no business. The government of Canada understands this required cost of work, and as such, offers Canadians the ability to deduct a percentage of these expenses from their personal income tax returns.
What Are Operating Expenses, or Opex?
To define operating expenses, consider all costs and fees associated with running and managing a business. Such costs incurred for the running of a company are tax-deductible. A tax deduction refers to a tax incentive whereby the government allows you to claim back a percentage of these required costs on your federal income taxes.
The allowable small business tax deductions on specific expenses are dictated by the Canada Revenue Agency and your income tax bracket.
8 Examples of Operating Expenses
Here are the top business operating expenses that are eligible for deductions:
- Office supplies, rent, and utilities
- Business tax, fees, licensing
- Professional service, accounting, and legal fees
- Motor vehicle costs
- Meals and entertainment
The above costs are just some of the various charges incurred when running a business. For a full list of deductible expenses, visit the Canada Revenue Agency’s opex list.
1. Office supplies, rent and utilities
The office expenses attached to your workspace can be claimed back on your taxes. The office supplies must be things you use directly in your line of work, such as pens, paper, ink, and toner. You could potentially deduct a percentage of your cell phone bills or laptop costs if a large portion of these costs were incurred in your line of work. If you work from home for more than 50% of the time, then you can potentially write-off home office expenses as well.
All standard commercial insurance policies related to your business, such as building and equipment insurance, are all deductible. The life insurance premiums you pay for your employees can be considered for tax write-offs too, as long as it’s a reasonable amount. Find more about the full criteria of insurance deductibility.
Advertising and marketing costs can take up a large percentage of a business’s budget. Luckily, the costs associated with these essential services can be written-off come tax time. Learn more about the guidelines for claiming advertising costs for online, broadcasting, and in-person marketing.
4. Business tax, fees, licensing
All taxes, fees, and licensing costs associated with running your business or services can be written-off on your income taxes. Various professions and trades require ongoing learning and licensing to maintain professional proficiency.
For example, you can deduct the cost of beverage licenses, trade licences, and professional certifications. The cost of these industry mandated memberships and permits can be claimed back, as they are required to practice your business.
5. Professional service, accounting and legal fees
Professional fees are a type of business expense that can be written-off. If you ever require the professional expertise of another industry in regards to your own work-related needs, then such consultation fees can be claimed back each tax year. This includes professional services such as accounting and legal fees associated with running your business.
If your business employs workers, then you can take advantage of the deductions associated with employees. The wage or salary you pay your employees is considered deductible. Therefore, accurate and completed timesheets can help you file these deductions as they are vital source documents for claiming some costs back.
7. Motor vehicle costs
Work-related usage of your vehicle can be written off each tax year. When driving for work-related purposes and business use, not including commuting, you can track and deduct specific costs for your mileage rate.
If your company has particular vehicles used only for work purposes, then you can potentially deduct all charges associated with the cars in question, including maintenance fees, insurance, gas, mileage, and more. Find out further details on expensing motor vehicle costs for your personal and work use.
8. Meals and entertainment
The cost of food and entertainment related to business- whether costs incurred when travelling afar for work, or for client or employee purposes- are deductible. However, you can only claim back up to 50% of the total cost of your meals or entertainment, but you cannot deduct more than that.
How To Deduct Operating Expenses On Your Taxes
To claim the deductions on your tax returns, you will need to fill in form T2125, Statement of Business or Professional Activities. On page 3, Part 4 of the T2125 tax form, you will see the list of business expenses in which you will fill in the total amount of deductions on the right-hand side.
Business Structure Dictating Claims
Many small businesses are structured as sole-proprietorship or partnerships. In which case, the owners of these businesses will write-off business operating costs on their personal tax return. Self-employed persons, small business owners that run their company as a sole proprietorship, unincorporated partnership, general partnership, or limited liability partnership, all must fill in and file the T2125 form, alongside their T1 tax form each year.
Incorporated businesses or businesses run as corporations, will have a separate corporate tax return from their personal returns. It is on the corporate return that these expenses must be claimed. For those who own incorporated businesses, learn more about corporate deductions.
Operating Expenses Formula
In accounting, the formula for calculating operating costs is pretty straightforward. You simply need to add all costs together to discover the total operating expenses for the tax year. The standard formula for your business might look something like this,
Total Operating Expenses = Office supplies + rent + utilities + Insurance + Advertising + Marketing + Business taxes + Licensing fees + Accounting services + Legal fees + Employee salaries + Mileage + Travel expenses + Meal and entertainment expenses
Using QuickBooks for Tax Deductions
To take full advantage of the ability to deduct business costs come tax season, you first need to track and record all expenditures made by your business throughout the year. QuickBooks Online is accounting software that can help you with this task. With automatic tracking and categorization of expenses, filing for deductions can be a straightforward endeavour.
Get proactive and start tracking your small business expenses today.