Running your own business can leave you with a large tax bill at the end of the year, especially since you need to pay your share and the employer’s share of your Canada Pension Plan contributions. To save as much money as possible, it’s important to maximize your tax deductions. Here’s how you can reduce your taxes and keep yourself safe even if the Canada Revenue Agency (CRA) decides to audit you.
Tracking Your Expenses
You can deduct any expenses related to your business. You may know certain expenses, such as your office lease payment and your inventory costs, off the top of your head. Others, including business travel costs and everyday expenses, may not be committed to memory, which is why you need to track them.
Although it’s smart to keep receipts for your business expenses, adding them all up when filing your taxes can be tedious. You’re better off using an expense tracker to log your business expenses when they happen. When tax time rolls around, the tracker provides an organized record of your business spending. Another option is putting expenses on a business credit card, that way you can refer to your credit card statements for most of your tax deductions.
Taking a Deduction for Vehicle Costs
If you drove your vehicle for business reasons, you can deduct most expenses you incurred from doing so, including gas, insurance, registration fees, and any necessary maintenance. The CRA gives you two options in how you deduct your vehicle costs. You can itemize all those costs and list them as deductions, or you can take the automobile allowance rate in your area for the number of miles you drove.
Remember that only business use of your vehicle is tax-deductible, so keep detailed mileage logs if you have a vehicle that you drive for both personal and business reasons. If you decide to itemize your deductions, you must determine what percentage of your driving was done for business purposes and deduct only that percentage of your vehicle costs. It’s typically easier to go with the automobile allowance rate so you don’t have to keep track of every expense.
Protecting Yourself from an Audit
No one wants to face a tax audit. When you file your taxes properly and avoid deducting unreasonable amounts, the odds of an audit are low. Even if you do get audited, all you need to do is provide your receipts and expense reports to verify that your tax deductions are legitimate. Make sure you keep your receipts on file in case you need them.
Double-checking your tax return and your deduction calculations is a good way to catch any potential errors before filing. If you catch an error after the fact, it’s a simple process to amend your tax return.
Deductions for business expenses ensure you don’t pay more than you have to in taxes. Track your deductions properly and keep verifying documentation to comply with record-keeping requirements and support any tax deductions you take.