When you run a small business, every penny counts. Your budget involves more than just sales, expenses, and profits—the way you file your taxes also has a big impact. That’s where tax savings for small businesses come in. By maximizing deductions and managing your income, you can lower self-employment taxes and pay less in taxes each year.
How Small Businesses Maximize Tax Deductions
As a small business owner, you probably spend a considerable amount of money to run your company. The good news? You can deduct many of these costs as current business expenses. When you deduct an expense, you subtract it from your income. That means that you pay less in income taxes and lower self-employment tax.
A current business expense is something you buy and consume quickly, such as office supplies or electricity. This is different from a capital expenditure, which provides a more long-term benefit. You can deduct the entire cost of a current business expense.
Some common examples are:
- Advertising services
- Accounting and legal fees
- Insurance on your buildings or equipment
- Maintenance and repairs
- Utilities and services
- Office supplies
- Equipment leasing
- Convention and trade show fees
- Private health services plan premiums
Take Deductions for Capital Expenditures
As a business owner, you can also deduct your capital expenditures—things you buy that add lasting value to your business. This list might include vehicles, buildings, or new equipment. The trick is to figure out which of your costs are current, and which are capital. According to the government, a capital expenditure is one that:
- Provides a lasting benefit
- Improves your property beyond its original condition
- Replaces an asset that’s separate from your property
- Has a high value compared to your property value
- Repairs your property in order to sell it
Imagine that your company owns a factory. If you replace a machine, it counts as a capital expense because the machine is a separate asset.
The Canadian Revenue Agency (CRA) has different deduction rules for capital expenses. Instead of deducting the entire cost, you can claim capital cost allowance (CCA). With the CCA, you must spread out the cost deduction over several years. The CRA has specific CCA deduction rates for each type of expenditure. If you buy a motor vehicle for your business, for example, you can deduct 30% of the cost each year.
Remember Business Use of Home Deductions
Do you run your business out of your home? If so, you can lower self-employment tax through business use of home deductions. This means that you can deduct part of the money you spend to maintain and run your home. These deductions can mean big tax savings for self-employed people.
Qualifying expenses include:
- Home insurance
- Cleaning supplies
- Property taxes
- Mortgage interest
- Since you also live in your home, you can only deduct a percentage of the costs. To figure out your deduction percentage, divide the area of your office by the total area of the house. Assume that you have a 1000-square-foot apartment, and your office takes up 250 square feet. Divide 250/1000 to get 0.25, or 25%. So, if you had $10,000 in home expenses, you could deduct 25%, or $2,500.
Consider Leaving Funds in the Business
When you take a salary from your business, you must pay income tax on that money. The money your business controls has a different tax rate. Often, the income tax rate is higher than the corporate tax rate. One way to reduce your taxes is to leave money in the business instead of taking it as a salary. If you can afford to take a lower salary, this can lead to big tax savings.
Before you decide which option is best for you, it’s a good idea to look at tax rate trends. If you expect them to rise in the coming year, you can save money by taking a salary now. If you expect them to drop, you might prefer to wait.
Look for Small Business Tax Credits
The CRA offers a variety of credits for small businesses to help lower self-employment tax. If you qualify, you can use the credits to reduce your tax bill. Some options are:
Scientific research and experimental development tax credits: You can claim this credit if you run a Canadian-controlled private corporation, and you spend money on research and development.
Investment tax credits: This credit applies when you buy specific types of property for your company. It’s limited to specific locations and industries in Canada—but if you qualify, it can lead to big tax savings.
Apprenticeship job creation tax credits: Do you hire apprentices in your business? If so, you can get a credit for 10% of their salaries. This credit maxes out at $2,000.
Save for Retirement
If you’re comfortable financially, you can reduce your taxes by contributing to a Registered Retirement Saving Plans (RRSP). The money you contribute is tax-free, up to a specific limit. Your limit is either 18% of your previous year’s income, or the CRA’s annual RRSP limit—whichever is lower. You can deduct this amount from your income. When you take the money out after retirement, you must pay taxes on it. At that point, you’re likely to be in a lower tax bracket, so you could save in the long term.
Lower Self-Employment Taxes with Income Splitting
Income splitting happens when you transfer some of your income to a family member who earns less. Since people with higher incomes have higher tax rates, income splitting can help lower self-employment taxes. If you’re earning a high salary, the lower rate can lead to big tax savings. It’s possible to assign income to spouses, children, and other family members. However, a change to the tax law restricts your options for income splitting.
You can still split your income legally in two ways:
- Loan the money to your spouse with an interest rate of ~1%
- Set up a family trust and assign your minor children as beneficiaries
Stay on Top of Your Finances
When you’re running a small business, staying in control of your finances can help you lower self-employment taxes. If your financial information is disorganized, you might miss deadlines, incur fees, or miss out on possible deductions.
A program like QuickBooks Online makes it easy to track expenses, sales, taxes, bank accounts, and more — you can even scan receipts using your smartphone for convenient recordkeeping. When everything is in one place, it’s easy to categorize expenses and identify possible deductions. Need to calculate a business-use-of-home deduction? All you need to do is run a report to find your qualifying costs.
Accurate records also help you defend your company during a CRA audit. If the agency requests documentation, you can provide it quickly. This can go a long way toward reducing fees and compliance costs.
When you run a company, every extra dollar can help you grow and bring in new customers. With a little preparation, you can find all of the possible deductions and credits. These tax tips make it easy to lower your taxes whether you’re a small business owner or self-employed. 5.6 million customers use QuickBooks. Join them today to help your business thrive.