Are you looking for tax deductions for your small business? Some tax-deductible expenses are all too easy to overlook: meals, entertainment, leisure activities and insurance, which is something you have to purchase anyway. Fortunately, you can write off many of these expenses to save some dollars on your tax bill.
Meal and Entertainment Expenses With Employees
The Income Tax Act imposes important limitations on the deduction of meal and entertainment expenses. As a rule, only 50% of the expenses are deductible, with the other 50% considered to be personal.
Meals and entertainment include restaurants and a wide array of other items and activities, including:
- Tickets to the theatre
- Tickets to a concert
- Seats at an athletic event
- Entertainment at nightclubs
- Entertainment at private sporting or social clubs
The only way to deduct club memberships is if you include them in your employees’ income as a taxable benefit. Most employees are unlikely to appreciate this. Since it won't help boost morale and employee happiness at your company, pay your club bill out of your own pocket.
Rules for Employer-Sponsored Events
If you’re looking to boost employee morale and give your employees a bonus in a tax-efficient way, consider a simple solution: throwing a party. The tax rules for employer-sponsored events are quite favourable for both the employer and employees, though the Income Tax Act and the Canada Revenue Agency (CRA) impose certain limits.
Tax laws allow for the full deduction of the expenses related to up to six employer-sponsored events per year. In this context, “employer-sponsored event” is basically a euphemism for “office party.” The 50% limit doesn’t apply to expenses for food, beverages, or entertainment that are generally available to all the employees at a particular place of business and that the employees consume. A classic example is an annual holiday party to which all employees are invited.
According to the CRA, a “particular place of business” doesn’t necessarily mean that you need to invite everyone from every department in your business. The CRA’s definition can include a cluster of buildings, a building, or a portion of a building, depending on the circumstances. For example, if you have office space in one place and a warehousing operation elsewhere, you can have two distinct functions for your two places of business. You don’t have to hold the party at your place of business. You can hold it at a restaurant, a rented hall, or any other appropriate location. The employer must pay for, and organize the event, but if the employer reimburses a social club for expenses, the 50% deduction limit applies.
As an added benefit, the exception for employer-sponsored events also applies to the costs of food, beverages, and entertainment for your employees’ spouses and children. The parties don’t represent a taxable benefit for employees.
Leisure Activities With Clients
Most businesses can write off 50% of the cost of leisure activities that involve entertaining clients at sporting events or concerts with clients, cruises, fashion shows, and nightclubs. A few specific businesses, including long-haul truckers and hotels, can write off even more.
Before claiming a deduction for these expenses, though, check with an accounting professional to make sure the claim is allowable. Nuanced CRA entertainment expense rules govern these deductions. For instance, you usually can’t claim the cost of season tickets for a sports team. You can’t claim green fees for golfing, but you can claim the meal you eat after golfing, as long as the outing is related to your business. To back up all these claims, keep your receipts, but also make note of how the event relates to your business. Those records can be essential in an audit.
The Insurance to Cover Everything
As a small business owner, you need to protect yourself and your assets. Having the right insurance policies is essential to this process. In most cases, if you buy insurance for your business, the CRA allows you to deduct the cost as a business expense. There are a few exceptions and grey areas you should understand.
General Business Liability Insurance
If someone is injured at your place of business or if someone brings a lawsuit against your business for another reason, general liability insurance can help. These policies are directly related to your business and don’t cover any personal issues. As a result, the entire premium is deductible as a business expense on line 8690 of Form T2125 (Statement of Business and Professional Activities).
Business Interruption Insurance
Business interruption insurance policies kick in when floods, windstorms or other disasters interrupt your business. You can opt for all-risk policies that cover a range of disasters or named policies covering only specified situations. Also, your business interruption policy may only cover expenses until you can open your doors again, or it may cover anticipated profits until you can get back to normal levels of productivity. You can include the full amount of these premiums on line 8690 of Form T2125.
Also referred to as business property insurance, commercial insurance policies cover buildings, machinery, and equipment used in your business. You can write off the entire cost of the deductible on Form T2125. If your company has a fleet of delivery vans or other vehicles that you use for your business, you may be able to write off the insurance for those vehicles along with your commercial insurance. If you use your vehicle for both work and personal reasons, you can only write off a portion of your deductible.
You can include the business portion of your vehicle insurance on line 9281 of Form T2125 with the rest of your vehicle expenses. Alternatively, instead of writing off a portion of your insurance and other expenses, you can simply claim a certain number of cents per kilometre driven.
In most cases, your home insurance doesn’t cover business liability issues. As a result, if you work from home, you may need to purchase a general business liability policy. If your home has an office, your home insurance covers damage to that space, so you can include a portion of your home insurance costs as a business expense. Use the calculation of business-use-of-home expenses chart on Form T2125 to determine what portion of your premiums are deductible.
In most cases, life insurance is a personal expense and not deductible as a business expense. If you’ve taken out a loan for your business against your life insurance policy, though, you can include a portion of your premiums as a business expense. Tax preparation software can help you calculate your deduction.
When you’re smart enough to run your own small business, you’re smart enough to seek out all the available tax deductions. QuickBooks Online can help you maximize your tax deductions. Keep more of what you earn today.
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