Tax deductions, or tax write-offs, are deductions an individual or corporation can make on their tax returns to reduce their taxable income. These deductions affect a person’s or business’s federal income taxes and must be approved by the Canada Revenue Agency once they have been filed.
Small business owners and self-employed individuals can benefit from the use of income-tax deductions, as they can be applied to various business and personal expenses to reduce your taxable income. So how can deductions work for you?
These topics will help you understand more about expense and tax deductions and it’s role in small business management:
- 10 Common Small Business Deductions
- 8 Business Operating Expenses You Can Deduct
- What are Overhead Costs?
- How to Deduct Home Office Expenses
- How to Deduct Vehicle Expenses
- How to Deduct Advertising and Marketing Expenses
- How to Expense Entertainment and Meals
- What are Travel Expenses?
- What are Miscellaneous Expenses?
- What is Capital Cost Allowance?
- What is EBIT?
- What is Bad Debt Expense?
- How to Claim Tax Deductions
- Best Receipt Scanners
- Best Expense Tracking Apps
How Do Tax Deductions Work?
A tax deduction is directly impacted by the income tax bracket of the individual filing for these write-offs. Your tax bracket is dictated by the income you bring home every year- the more money you make, the more taxes you pay.
A deduction is only worth a specific percentage of a person’s federal income tax return. This percentage hinges on the tax bracket of the filer. Check out this chart to discover how much tax deductions are worth to you:
A person with a gross income higher than $203,000 will pay more taxes than a person with an income under $46,000, but it also means the higher earner will gain a higher deduction percentage for the same expense.
Personal Income Taxes vs Corporate Taxes
Depending on the structure of your business, the filing of your income taxes will differ. Small companies run as sole-proprietorships (single owner) or partnerships (partnered owners) will file their business expenses on their personal income taxes. Businesses run as Corporations will have a different set of tax returns for the corporation, known as corporate income tax.
What Can I Deduct on My Taxes?
Tax deductions can be made on the expenses of a business. As a small business owner or self-employed individual, the costs incurred from running and operating a business are considered tax-deductible each tax year, up to a certain point. There are various categories of expenses that are tax-deductible, as governed by the Canada Revenue Agency (CRA).
Tax Deduction Example
Tax-deductible business expenses include operating costs such as:
- Office supplies and rent
- Professional services such as accounting and legal fees
- Employee salaries
- Business travel expenses
- Professional courses and certifications
- Capital gains
Other tax-deductible expenses include:
- Childcare expenses
- Home mortgage interest
- Student loans and student loan interest
- Charitable donations
- Private health insurance premiums
These are just a few of the various expenses that can be deducted from your federal tax returns. Find out the ten most common small business expense deductions.
Are Tax Deductions Worth It?
Yes, tax deductions are worth your time. The purpose of these deductions is to ensure that individuals reduce their taxable income. The CRA allows for this as a means for households to decrease the amount of tax they owe the federal government.
Deductions offer individuals a way to gain back part of the cost of mandatory expenses. Therefore, it is always advantageous to know of the various tax benefits and incentives, like the deductions and tax credits that are applicable to you and your business.
Source Documents and Deductions
To successfully file itemized deductions on your returns, you will need to record each and every expense of your business. It is the bookkeeping and accounting records that will illustrate these expenses and deductions. Keeping accurate records throughout the year is necessary to do this.
When an expense has been incurred, you will need to keep the evidence that shows this transaction. This evidence is the paper trail of such expenditures and operation costs known as source documents. These source documents include:
- Cash receipts
- Credit notes
- Bank statements
- Statement of account
Suppose you write a cheque to a professional lawyer to pay for consultation services for your business. This cheque is the source document for this expense, which is tax-deductible, as the cost is associated with the operations of your business. On the same note, paying the salaries of your employees is also an operating cost that is tax-deductible, therefore the completed timesheets are the source document in question to illustrate this expense.
How Long Should I Keep Business Records For?
The CRA dictates that all personal and business tax records, along with financial statements and source documents, should be saved for a minimum of six years from the end of the last tax year they were filed in.
Using Accounting Software to Help With Tax Deductions
To make the tax deductions and filing process as easy as possible come tax season, consider using accounting software that automatically sorts and tracks your expenses for you.
Software like QuickBooks Online offers business owners and individuals a quality platform that allows them to categorize their finances based on expense type and income to keep accurate and detailed business records throughout the year.
Features like receipt scanners ensure you track your source documents to get the most out of your expenses when it is time to claim your deductions.