Are you one of the new breed of small entrepreneurs who is taking advantage of online platforms like AirBnB to rent out your property? If so, then you surely know you need to declare your income when you file your taxes. But don’t forget that there are many deductions that you can use to reduce your taxable income.
Gross Income Versus Net Income
In order to declare the correct amount of income, you need to make the distinction between gross income and net income. In a nutshell, gross income is all of the money you receive from your guests or, in other words, your total sales. Net income is what is left over from your sales once you have deducted all of the expenses that the law allows. Your net income is what you actually pay taxes on.
As a rule, you are allowed to deduct all of the expenses you incur to earn your income. If you purchase an item solely for the purpose of using it in your rental business, you can deduct the entire cost of it. If you use it partly in the rental business and partly in your personal space in the building, then you need to separate out the personal portion from the business portion and deduct only the business portion. For example, think of your power bill. Part of the electricity is used for your personal space in the building, but part of it is used by your guests, and that portion is deductible.
Figuring out the right portion to assign to personal use and to business use can be tricky. Basically, you need to come up with a reasonable method of calculation and apply it consistently over the years. Elements to take into consideration are the part of the home you use for business versus personal space, often calculated by square footage as well as the number of days in a year where the space is available for rent. If you’re unsure of the math in your case, it might be a good idea to consult a tax professional in the first year to start off on the right foot.
Current Expenses and Capital Expenses
The second distinction that you need to understand in order to deduct the correct amounts from your gross income is current versus capital expenses. A current expense is when you buy an item to use it immediately in your rental business and it is fully used in the year it is bought. Soap for guests, linens and cleaning services are all obvious examples. Some more subtle ones are your accounting and legal fees, any permits that you pay for and advertising costs. While these last ones don’t relate directly to your guests, they are certainly directly incurred to earn income from your business.
Capital expenses are a little trickier. Essentially, if you buy something, like furniture, that is meant to last several years, then you can’t deduct the whole price in the current year. Instead, you need to deduct a percentage of the cost over a number of years. This is the process called amortization. The same goes for any renovations you make to the building. Unless you’re dealing with minor repairs, you need to deduct renovations over a period of time. The exact amortization is determined by the law, so you may wish to consult a professional early on to get off on the right track.
One final word to the wise: keep all of your receipts. You may be required to demonstrate to the Canada Revenue Agency that you did indeed incur the expenses you are trying to deduct.