Like many business owners, your days are consumed with keeping the revenue flowing in and the bills flowing out. Somewhere in between, it is not uncommon for receipts and invoices to get lost in the shuffle. As a result, tax payments can be miscalculated and you either underestimate what you owe or pay too much. Poor bookkeeping habits can lead to financial problems, one of the leading causes of small business failure. Developing a sound method of tracking business expenses helps alleviate some pressure when it is time to file your annual return with the Canada Revenue Agency.
What to Track
Some of your larger overhead expenses are relatively easy to track. Lease or mortgage payments are likely burned in your brain, and the odds of omitting or misstating them are slim. However, the day-to-day expenses you incur from activities such as meals, entertainment, and travel tend to accumulate. Engaging a client through a lunch or social event is fair game. Just be sure to record who was involved and the business purpose. The CRA scrutinizes these expenses, as many taxpayers blur the line between personal and business expenses. Mileage records should also be carefully compartmentalized, especially when using personal vehicles for business purposes. Don’t attempt to guess. An audit requires the submission of detailed records. The more organized those records, the less likely you are to walk away with any problems.
How to Track
Finding the time to properly log these expenditures on a daily or even weekly basis often seems monumental, especially when there are customer, vendor, and employee relationships to manage. While these expenses may seem insignificant, the aggregate amounts spent over the course of a year can greatly affect your tax liabilities. There are a few different ways to stay on top of cash outlays that aren’t regularly invoiced by banks, utilities, and suppliers. You could do it yourself. If you are the business, without any employees, delegation is not an option so you must find time to enter these expenses. If you have an employee, you can trust that person to undertake the task. But, it may pull the employee away from a primary duty, and unless that primary function is bookkeeping, your business could suffer. Hiring a dedicated bookkeeper is costly, even on a part-time basis. A valid and less expensive alternative is employing accounting software, such as QuickBooks Online, which actually saves small business owners about 11 hours per month on average.
When to Track
Corporate returns in Canada are required to be filed six months after the end of the fiscal year. But don’t wait that long to get organized. Track business expenses on a weekly basis at minimum. The use of accounting software enables taxes to be filed electronically. Those weekly entries are categorized according to GIFI codes assigned to common categories of business expenses. These expenses can easily flow to your T2, keeping you on point and minimizing the chance of underpayment or overpayment.