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Step-by-Step Guide for Canadian Income Tax Preparation

Your first year of business is bound to fly by. One day you’re dealing with a customer or sourcing supplies, then you suddenly realize you’ve been running your own small business for a whole year. While it’s something to celebrate, your also need to prepare in advance, because year-end demands financial and tax accounting to be ready for your next year of business operations. Make sure your new business can file all the necessary tax documents accurately and on time with this guide to preparing for tax season.

Don’t Wait to Get Your Books in Order

Waiting until the last minute to get your books in order can lead to undue stress when it comes time to complete your tax return. Combing through piles of receipts, invoices, and other records in an attempt to organize a large volume of material at once can lead to mistakes. Those mistakes can cost you money in penalties or in missed deductions.

It’s worth it to get your books in order well before tax time to make your return is as accurate as possible with the greatest amount of deductions. Ideally, you should set aside time devoted to this task once a week, or at least once a month. It’s easier to be consistent if you always use the same timeframe. As your business grows, you may even want to hire a bookkeeper for a couple hours per week. Ultimately, this extra bit of organization helps you streamline quarterly and annual tax reports as well as your finances in general.

Implement an Accounting System

No matter how small your business is when you start it, you still need to have a proper accounting system in place, whether that means using accounting software, such as QuickBooks Online, or hiring an experienced bookkeeper to do the work for you.

QuickBooks can help simplify your accounting processes. You can integrate paperless invoices with your accounting software, which is then backed up on the cloud. QuickBooks lets you automatically create statements each month, and it neatly files them away for easy reference. The system stores all of your financial documents and information in one spot for easy finance monitoring. If you work with a bookkeeper or accountant, you can easily share your accounting data with those financial pros through QuickBooks.

Whether you’re running a retail, service, or manufacturing business, managing your business’s finances well is key to its success. But of course, no matter what accounting solution you’re using, you can’t get the data you need at year-end unless you input or share all of the necessary data throughout the year. That’s where consistent data entry and bookkeeping keeps you on track for tax time.

Use Apps

Another way to simplify your finances at tax time is with various apps for activities such as tracking receipts, monitoring inventory, and recording mileage. Many of these apps integrate with QuickBooks, so the data transfers automatically for easier accounting. You can simplify the data entry of business expenses by using apps such as Expensify. Snap a photo of your business receipt as soon as you pay it, and it sends a copy directly to your accounting software. If you use a car for work, apps such as TripLog automatically track the mileage and log expenses. If you work in retail, you can turn to apps such as SOS Inventory to determine what’s in your stockroom, which helps you calculate net income at year-end.

Separate Personal and Business Finances

Separating your business and personal finances and keeping them that way makes tax time less stressful and more organized while helping to keep the tax man off your back. Use these tips for keeping your finances separate:

  • Open separate chequing accounts. This creates a clear paper trail that makes it easier for you to keep your business accounts straight.
  • Get a business credit card. This makes it easier to keep personal and business purchases separate when it comes time to record transactions.
  • Keep your finances separate in your software, too. When you use QuickBooks, it’s easy to to manage multiple accounts — one for your personal finances and one for business.
  • Store business receipts separately. Avoid the need to sort through and separate receipts by keeping your business receipts separate from your personal ones. You can organize them by expense category if you want to make calculating income tax deductions faster.
  • Keep logs. A motor vehicle, your phone, your house — there are many things you use in the course of doing business where you can only claim a portion of your costs as business expenses. Keeping logs of your actual business use is essential. Whether you do it the old-fashioned way by writing entries in logbooks or by using an app on your mobile device, keeping logs makes figuring out the right percentages a snap at tax time and gives you the evidence you need to claim expenses.
  • Investigate incorporation. You may want to talk to an accountant about changing your business structure. Incorporation gives you a whole new level of separation between your personal and business finances, as corporations are legal entities in their own right. Their built-in liability protection is a plus if you’re operating a business that has a higher risk of legal liability. Corporations also benefit from tax advantages that aren’t available to sole proprietorships and partnerships.

Stay on Top of Customer Accounts

Slow-paying and non-paying customers don’t just create more work for you and your employees. Too many of them can make a negative impact on your balance sheet at year end. It’s a good idea to keep on top of your past-due invoices year round to keep your cashflow high and prepare for tax time. You might choose a regular interval, such as once a month, to review customer accounts and take action. That might include reducing customer credit or calling in collection agencies to clear up your books in advance.

Pay Taxes Ahead of Time

You need to pay your annual Goods and Services Tax (GST) and Harmonized Sales Tax (HST) by January 31st and file a corporate income tax return as well as a personal one, so don’t let that surprise you come January. If you file late, you can expect penalties on top of any taxes you owe. So take the time when you first start your business to find out what taxes you’re responsible for and when the various tax filings that apply to your business are due.

Register for the Appropriate CRA Tax Accounts

If you haven’t already done so already, registering for an online business account with the Canada Revenue Agency (CRA) can be beneficial. In addition to accessing your tax information, you can set up pre-authorized debits for GST/HST installment payments. Paying on time means no interest and less hassle at the end of the year. You can also download the CRA’s Business Tax Reminder mobile app and create custom reminders of due dates, including remittances.

Registering as soon as possible for the necessary tax accounts makes filing the necessary tax forms smoother when the time comes. Plus, some registration is time-sensitive, so registering early can help you avoid missing deadlines. For example, if you run your business as a small supplier and go over the $30,000 limit, you need to register for GST/HST within 29 days of the day your business exceeds that limit.

Have a System for Filing Receipts

If you’re inclined to keep business receipts in a glove box, shoe box, or drawer, take some time to separate all your expense receipts into categories and tally each category. Having organized piles of receipts rather than a big jumbled cluster saves you time and reduces frustration at tax time. Implement a receipt filing system now before you forget the details of your business expenses. Get in the habit of saving every business-related receipt and filing your receipts in an organized way so they’re easily accessible at tax time. Be sure to keep your business-related receipts from the period when you were getting ready to start your business. You may be able to claim some of the expenses you incurred while preparing to open your business as tax deductions on your income tax.

With an increasing number of businesses going paperless (even the CRA now offers online statements), keeping track of your finances, including expenses, as they occur has never been easier. Cloud-based accounting software, such as QuickBooks, offers an accurate way to keep track of bank account activity, expenses, and invoices year-round.

Estimate Your Tax Bill and Set Aside Money

When you’re a new business owner, it can be a challenge to estimate your company’s tax bill. But having an idea of what to expect can help you plan for potential payments, and it gives you time to set aside money for that bill. Just as with your personal taxes, paying your business taxes in installments lets you avoid having to make one huge payment when the tax due date falls. While it can be difficult to estimate how much income your business might bring in in its first year, you should be able to make a good estimate by keeping a close eye on your ledger.

Examine Last Year’s Tax Return

Making the most of your deductions helps you save as much money as possible at tax time. Learning from your past returns can help you spot what to look for going forward. By reviewing last year’s filing and keeping up-to-date on new tax laws and benefits, you can educate yourself about expenses you can claim and plan accordingly for future years. Since tax laws change from year to year, understanding what special tax credits are available for entrepreneurs and small businesses, such as research and development credits, can be hugely beneficial.

Traditionally, year-end is the time to reflect on how the past year has gone and to plan for the future. It’s a time to pull out your business plan, your objectives, and your action plans and engage in goal setting and future plans to set your course going forward. Instead of waiting until December 31 to start planning, look back now and start on your new plans immediately in the new year to make your next fiscal year even more profitable.

Evaluate Your Accounting Practices

The big question to consider is whether the accounting system you used during the year has done the job. Have you been able to input all the financial data you need to track? Have you gotten the financial information you need to make informed decisions and comply with all tax and government requirements? Is the system efficient and easy to use? If the answer is “no” to any of these questions, then it may be time to make some changes. Maybe you need to hire more staff to handle data entry, or you might need a more robust accounting solution than you’re using now. You start with a bookkeeping system, but you don’t have to keep it the same year after year. Like many of your business processes, your accounting should evolve as your company grows so it can become more efficient and accurate.

Get Expert Accounting Help

If you’re a new business owner who is unfamiliar with tax law, it can be helpful to consult a professional accountant. An accountant who is experienced at working with small businesses can provide invaluable advice about financially managing your new business and keeping it tax compliant. Your accountant should also be able to inform you about tax strategies that can save your business time and money. But don’t wait until tax time to ask your accountant for tax prep advice. Stay in contact with your accountant throughout the year. While you may think visiting your accountant is an annual chore, regular check-ins ensure there’s less paperwork and stress come tax time. A skilled professional can also help you identify gaps in your financial management and cash flow and help you make the most of your taxable income. Your accountant can also alert you to new tax laws or law that are changing and help you assess how they might impact your business.

File Taxes With Quickbooks

Who wants the tax tiger chomping up their profits? Make preparing for business taxes a priority and keep more of your new business’s profits for yourself.

By getting organized now and taking advantage of apps and technology, you save time and money while reducing headaches when preparing your next tax return. While it may be tempting to forget about taxes until next year’s return is due, you can help eliminate stress by implementing measures now. QuickBooks Online can help you maximize your tax deductions. Keep more of what you earn today.

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