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How to Claim Tax Deductions for Your Small Business

Claiming business expenses on your income tax returns is part of the deductions process for any small business owner or self-employed individual in Canada. Such deductions, or write-offs, are a tax incentive that will help you lower your taxable income each year on your tax return.

Learn how to deal with various deductible company expenses in time for the next tax season.

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Dealing With Deductions

If you run your own business, then the structure of your company will dictate how you file your tax returns and claim back deductions. Typically, companies are either structured as a sole-proprietorship, partnership, or corporation.

A sole proprietorship refers to a single person owning a company, while a partnership generally means ownership is divided between two or more parties. In either instance, the owner(s) will file their business returns with their personal income tax returns, claiming back business expenses within the same return.

An incorporated business, or corporation, will have a separate company return from the owner or shareholders’ personal income return. People choose to incorporate their business for liability protection, as the individuals and corporations are seen as separate entities.

Canada Revenue Agency

The Canada Revenue Agency, or CRA, is the revenue service branch of the Government of Canada. It is the CRA that overlooks Canadian taxes and dictates what deductions and tax credits and other tax incentives pass the approval process. The Government of Canada’s website is where you can find all information pertaining to credits and deductions, as well as federal tax forms and incentives, including the CRA tax deduction list.

For those wondering what can I claim on my taxes in Canada, here are seven types of expenses that can be deducted from your returns each year for a greater tax refund.

How To Claim Operating Expenses

Business operating expenses refer to all costs incurred in the management and running of your company. When dealing with such expenses and related tax deductions on your personal income returns, you will need Form T2125, Statement of Business or Professional Activities

All expenses listed under Part 4 Net income (loss) before adjustments of the T2125 form are considered operating expenses. Each line must be filled in with an exact amount of the related business expense.

In every instance of a deductible expense, you will need to provide the CRA with source documents to back up your claim. These source documents are evidence of the transactions associated with the deductible expenses, meaning receipts, invoices, billing statements, and other paper or electronic documents that illustrate you made a business-related transaction.

You can also write-off non-business-related expenses like student loan interest and other education expenses, child care expenses, medical expenses, home mortgage interest, and various types of parent or family expenses.

How To Claim Vehicle Expenses

Certain vehicle expenses can be deducted on a personal income tax return if generated from work-related driving. An individual who drives their motor vehicle for business and personal use can only deduct the expenses incurred while using said vehicle to earn income.

A percentage of the mileage you drive and gas you use for work-related trips are such claimable expenses. However, individuals should note that regular commuting expenses, and the gas and mileage incurred while driving to and from your place of work, do not count as deductible expenses. Only the mileage, gas, and relatable parking fees associated with work duties will be approved by the CRA.

To write-off vehicle expenses, you will need Form T2125. On page 3, Part 4, fill in line 9281, Motor vehicle expenses (not including CCA).

Each year you should get into the habit of recording your vehicle’s odometer, and starting a logbook for mileage. Certain accounting software, such as QuickBooks Online, offers users a mileage tracker to keep track of the distance driven for work purposes. Such evidence shown in the logbook is required by the CRA to approve the deductions.

Check out this article for further details on writing-off various vehicle expenses.

How To Claim Meal and Entertainment Expenses

Meals and entertainment expenses made for work-related situations, such as client dinners and staff lunch meetings, are deductible. A portion of the costs could be claimed back only if the meal or entertainment was conducted with business in mind. Be aware that the CRA only allows an individual to deduct 50% of the costs associated with these food and entertainment expenses.

Again, using Form T2125, on page 3, part 4 of the return, line 8523 entitled Entertainment and meal expenses is where you will write in 50% of the total cost of such expenses.

How To Claim Home Office Expenses

If you work from home or have recently outfitted a home office in light of the current pandemic, such home office expenses could be deductible. Depending on your employment status, they will require different forms or pieces of evidence to illustrate the need and use of a home office space.

Employed Individuals

For employed individuals, the guidelines have changed for claiming home office expenses during the COVID 19 pandemic, as more people are working from home. In such instances, the employee will need to keep a copy of Form T2200, Declaration of Conditions of Employment, with their tax records to indicate that their employer has signed off on their need to work from home.

Self-Employed Individuals

Self-employed individuals can easily claim back their office expenses when they file their self-employment income returns. This includes a part of the cost of home office supplies and utilities, such as rent and electricity, if the majority of their business happens at their place of residence.

All that the CRA requires is that the home office workspace is where more than 50% of all work hours are spent, and that the workspace is specifically used to earn employment income and meet clients or other people over the course of their duties.

home office deductions tax form

To deduct the cost of home office supplies and utilities, find page 4 of the T2125 tax form. Part 7, entitled Calculation of business-use-of-home expenses can be filled in sections A to O with the related costs and figures on the right-hand side. For non-utility expenses, such as home office supplies, these costs can be written in on line 7G, Other expenses, specifying supplies.

How To Claim Travel Expenses

The cost of work-related travel, such as airplane and train tickets, rental cars, baggage fees, accommodations, and meals are all included within this deductible category. A business trip is only considered work-related and tax-deductible if over 50% of the time is spent on duties related to your business. The costs incurred while speaking at an industry-related conference or travelling to meet a client are both deductible travel instances.

For employed individuals, the CRA also states that travel costs are deductible only if the individual is required to work away from their regular office space, and had to pay their own expenses as stated in their contract of employment. And finally, their work did not provide them with a non-taxable allowance to cover travel costs. When filing a deduction as an employed person, you will also need a copy of Form T2200, Declaration of Conditions of Employment, completed and signed by your employer and kept on file.

In the case of the business owner, or self-employed individual, such expenses can be written-off on the Statement of Business or Professional Activities, Form T2125. On page 3, Part 4, on line 9200, entitled Travel expenses, fill in the total costs of all travel-related expenditures.

How To Claim Advertising and Marketing Expenses

Advertising and marketing in this day and age is a big must for companies to reach their targeted audiences and attract more customers; that’s why the Canadian government has made the cost of these essential professional services tax-deductible.

However, for a business to write-off advertising expenses, the marketing must have occurred in Canada or been overseen by a Canadian company. The advertising medium also affects deductibility, such as if it were online, through radio or TV broadcasting, during public events, or printed in a periodical. There are also a number of provincial or territorial tax credits available for Canadian based operations.

To claim back a part of these advertising costs, look to line 8521 on form T2125, where it says Advertising, fill in the amount on the right-hand side and add it to the total expenses at the bottom of the list.

How To Claim Miscellaneous Expenses

Miscellaneous expenses are small amounts of uncategorized expenses. Items or services used for business purposes that do not fall into any other expense category can be lumped together into one Miscellaneous account.

Miscellaneous expenses do not have a dedicated line on the T2125 form. Still, such costs can be written on line 9270, other expenses, (specify), in the space provided.

Expense Tracking and Tax Deductions

Get the most out of these tax benefits by keeping organized records and accurate accounting information for your business. Using software to track and categorize expenses automatically will make the deduction process easier to deal with come tax season. With all of your related expenses in one place, you can calculate and claim back the highest amount to lower your total taxable income.

The expense tracking feature of QuickBooks Online has helped millions of individuals categorize their business costs and claim the appropriate deductions for the most significant effect. Join them in their success for the next tax season.

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