If your small business pays an operating expense, chances are you can write-off a percentage of that expense from your taxes. A tax deduction, or tax write-off in accounting is a form of incentive that allows businesses and individuals to deduct that amount from their taxable income, as permitted by the Canada Revenue Agency.
Here’s how tax write-offs in Canada work, and why they should be used for your small business.
What Does Tax Write-Off Mean?
A tax write-off or deduction, is a business expense that can reduce your taxable income, affecting the calculation of your federal income tax. Provincial tax rates and tax brackets play a key role in the amount a write-off is worth to you. As long as you are paying some tax, a deduction is worth a specific percentage of your return, based on your tax bracket.
Therefore, if your yearly taxable income is under $46,000, a deduction is worth about 25%. If your taxable income is between $46,000 to $92,000, the deduction is worth 34%. If your tax bracket is between $92,000 to $142,000, it is worth 42%; anything between $142,000 and $203,000, is 46%; and anything over a taxable income of $203,000, a deduction is worth 50%.
For example, a write-off of an expense for $100 is actually worth anywhere between $25 and $50 to you, depending on your tax bracket.
Tax Credit vs. Tax Deduction
Where a deduction is worth a percentage of money based on your taxable income, anywhere between 25% to 50%, tax credits, on the other hand, are a direct reduction in taxes, dollar-for-dollar. If you were to receive a credit for $100, then the worth of the credit is exactly $100 to you.
What is the Benefit of a Tax Write-Off?
A tax-write off allows individuals and businesses to lower their taxable income. As a tax-payer, a write-off is highly beneficial to you, as it will save you money on your tax bill overall. Small business deductions are a common way that businesses can account for reductions in their revenue due to expenses.
To take full advantage of tax write-offs, it is vital to track and record all business expenses as they occur, to deduct them later.
What Can be Written-Off as a Business Expense?
Expenses made by a business must be approved by the Canada Revenue Agency to receive a tax deduction. All that is required is that these operating expenses are made for the continued running of the business.
Examples of Tax Write-Offs
Below is a list of examples of small business and self-employed business expenses that can be written off on your company’s taxes:
- Education and training
- Vehicle expenses
- Rent and lease
- Legal and accounting fees
- Employee benefits
- Health and work insurance
- Travel expenses for business trip
- Meals and entertainment for clients or employees
- Office supplies and postage
- Home office expenses
- Capital assets
Stay compliant and avoid penalties, check the full list of tax deductible operating expenses approved by the CRA. Individuals can also apply tax write-offs on their personal income tax returns, such as for child care expenses and clean energy expenses. But it is always best to check the validity of these tax deductions with the CRA.
Vehicle Write-Off Example
As a small business owner, if you use your vehicle for business purposes, then the expenses associated with that vehicle are tax deductible. Such expenses include gas, parking fees and toll charges, repairs and maintenance, even lease payments if you lease a car. Learn more about applicable vehicle tax write-offs.
However, you need to be careful when writing-off vehicle expenses for business use, as they are one of the most heavily abused deductions. The Canada Revenue Agency is very particular of these deductions as a result. Therefore, keeping an accurate logbook, and milage count of your vehicle to separate personal and business use is paramount.
Small Business Deductions for Capital Assets
A capital asset, also known as a fixed asset, is a tangible asset that will be used by the company for longer than a year to help generate income. Capital or fixed assets for small businesses most typically include property, plant, and equipment.
When it comes to assets and write-offs in accounting, they must be handled differently from expenses. A capital asset can either be written-off when it reaches the end of its life, when it becomes obsolete, or when it is sold off. At the time of its removal from the business, the asset must also be expunged from the business’s balance sheet. Depending on the reason for its removal, depreciation of the asset must also be accounted for.
Using Accounting Software
Purchasing and using accounting software for your business is another tax deductible expense! Self-employed individuals and business owners that use QuickBooks to manage their bookkeeping and other business responsibilities can deduct the software cost on their taxes as it directly helps them run their business. Maximize tax write-offs for your small business with the use of QuickBooks.