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What is a Tax Write-Off in Accounting?

Have you ever found yourself wondering, "What is a tax write-off?" You're not alone!

Navigating the world of taxes can be daunting for small business owners. As we enter 2024, understanding tax write-offs is crucial for maximizing your returns and minimizing tax liabilities. This guide provides an updated overview of tax write-offs for small businesses in Canada, helping you make informed decisions to benefit your business financially.

Keep reading to learn how tax write-offs in Canada work, and why you should take advantage of them. 

How do tax write-offs work?

A tax write-off, or deduction, is not just an accounting term — it's a vital tool for small businesses and entrepreneurs. Essentially, it refers to any legitimate business expense that can be subtracted from your total revenue, thereby reducing your taxable income.

Write-offs only apply to business expenses, even though you may hear people say they're going to "write off" their childcare expenses, which are not a business expense, but rather an expense that can be claimed by any taxpayer who pays for childcare — not just small business owners.

Claiming business expenses properly is crucial for small businesses, as it directly impacts the overall tax bill, making it a strategic aspect of financial planning. The value of a tax write-off largely hinges on your specific tax bracket and the provincial tax rates applicable to your business, which can vary across Canada.

Current tax brackets and deduction values

The year 2024 brings with it updated tax brackets in Canada, which play a significant role in determining the value of your deductions. While you should remember that your 2023 taxes still fall into the 2023 tax bracket, here's a breakdown of the federal 2024 tax brackets for the upcoming year:

  • For incomes under $55,867, deductions are worth approximately 15%.
  • Incomes ranging from $55,867 to $111,733 see deductions worth about 20.5%.
  • Earnings between $111,733 and $173,205 can expect deductions to be around 26%.
  • For the $173,205 to $246,752 bracket, deductions are valued at 29.32%.
  • Incomes over $246,752 can leverage deductions worth 33%.

These figures are pivotal in planning and estimating your tax liabilities for the year. 

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The difference between a tax credit and a deduction

Deductions are most often claimed by small business owners. They are business expenses that reduce their taxable income. Tax credits, on the other hand, can be claimed by small business owners as well as individuals who don't have a business. Eligibility for tax credits is largely determined by personal circumstances.

The distinction between a tax credit and a deduction is fundamental in tax planning. While a deduction reduces your taxable income, a tax credit directly reduces your tax bill on a dollar-for-dollar basis. Understanding this difference can significantly affect your financial strategy and tax obligations.

For example, if you owe $2,500 in taxes and you're eligible for a tax credit of $500, after the credit is applied on your tax return, you owe $2,000. But if, instead of a credit, the $500 is a deduction and you're in the highest tax bracket (taxed at a rate of 33% federally), your tax bill is now $2,500 - ($500 x 33%) = $2,335.

Tax deductions and credits are both essential tools in tax planning and can significantly impact an individual's or business's financial health. Their applicability and value depend on personal circumstances, including income level, type of expenses, and specific eligibility criteria set by the Canada Revenue Agency (CRA). 

Medical expense tax credit

For example, the medical expense tax credit (METC) is a non-refundable tax credit that helps Canadians reduce the financial burden of medical expenses. It can be claimed for a wide range of medical expenses that are not covered by insurance or other government programs.

The amount an individual can claim for this credit is determined by their net income (from all sources, business or otherwise). If medical expenses total more than 3% of their net income, they can claim the amount of the expenses over that amount.

For example, if a taxpayer has a net income of $50,000 and incurs $3,000 in eligible medical expenses, they would be able to claim the amount that exceeds 3% of their net income (which is $1,500). So, they can claim $1,500 ($3,000 - $1,500) for the METC.

The credit the taxpayer will receive against their taxes owing is calculated as the $1,500 they can claim multiplied by the lowest tax bracket. In this case it is 15% federally, so the credit equals $1,500 x 15% = $225. If the taxpayer owed $1,000 in taxes, they would subtract their medical credit amount of $225 to get a new amount owed of $775 ($1,000 - $225).

Unlike the tax savings on deductions, which are calculated based on the taxpayer's tax bracket, most tax credits are calculated using the lowest tax bracket. There are exceptions, and it's always advisable to consult with a tax professional or refer to the CRA's guidelines to understand which deductions and credits are applicable in individual cases.

Benefits of a tax write-off

Tax write-offs are integral to managing and minimizing your business's tax liabilities. By reducing your taxable income, these deductions can lead to significant savings on your annual tax bill. They encourage businesses to track and manage their expenses diligently, ensuring that every eligible cost is accounted for.

What can I write off on my taxes?

The Canada Revenue Agency sets specific guidelines on what constitutes an eligible business expense for tax write-offs. These expenses must be necessary and directly related to the running of your business. Some of the eligible expenses include:

  • Education and training, enhancing the skills and capabilities of you and your employees
  • Vehicle expenses, such as fuel, maintenance, and insurance, for business-related travel
  • Rent and lease payments for business premises or equipment
  • Advertising costs, including marketing and promotional expenses

Find a complete list of eligible business expenses on the CRA website.

Vehicle write-offs

Vehicle expenses are a common area for business deductions, provided they're used for business purposes. However, due to instances of misuse, the CRA scrutinizes these deductions closely. Maintaining accurate records, including a detailed logbook of business-related travel, is essential to justify these expenses and remain compliant.

Deductions for capital assets

Capital assets, also known as fixed assets, are treated differently in tax accounting compared to regular business expenses. These are long-term assets like property, equipment, or machinery used in your business over several years.

To that end, they are not deducted as a business expense, but rather tracked over the life of the asset. A portion of the cost of the asset can be claimed each year as Capital Cost Allowance (CCA) — tax-speak for depreciation.

Equipment generally has a depreciation rate of 20% per year (except in the year of purchase, where only half that amount may be claimed). If a taxpayer purchased a machine that cost $1,000, they could claim a deduction for CCA on that machine of $100 ($1,000 x 10%) in the year of purchase.

The following year, the taxpayer can claim a CCA of 20% of the remaining value of the machine, which is the original cost minus any CCA already claimed. In this example, they could claim $180 ($1,000 - $100 = $900 x 20% = $180).

Avoiding common mistakes with tax write-offs

New business owners often navigate a steep learning curve when it comes to tax write-offs, and it's not uncommon to encounter pitfalls. One frequent mistake is overestimating what can be claimed, leading to the rejection of deductions by the CRA.

For example, personal expenses that are not directly related to business activities are often incorrectly claimed. Another common error is failing to keep detailed records and receipts, which are crucial for substantiating expenses if audited by the CRA.

To avoid these missteps, it’s essential to have a clear understanding of what qualifies as a legitimate business expense. Regularly consulting CRA guidelines and seeking advice from a tax professional can be immensely beneficial.

The role of accounting tools

Incorporating accounting tools like QuickBooks into your business operations is not only a smart management move, but also a deductible expense. QuickBooks assists in organizing and categorizing business expenses, making the process of claiming deductions more streamlined and efficient. QuickBooks' ability to track expenses in real time and generate detailed reports can be invaluable during tax season.

Stay informed and compliant with your tax write-offs. Utilize QuickBooks to simplify tracking business expenses and maximize your deductions. Learn more about how QuickBooks can assist your business today. 


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