Often deductible business expenses are overlooked or missed as business owners are unsure whether they are deductible.
A business expense is any cost incurred by the company to generate income. These expenses must be supported by physical documents such as invoices, purchase contracts, sales receipt, etc. If cash is used to purchase items, it is especially important to ensure that a physical receipt is obtained. If a credit or debit card is used, the merchant receipt, not the credit/debit card receipt must be kept. Credit card statements do not qualify as a receipt. Receipts should typically include the seller’s name, date of the purchase, and description of the item that was purchased.
The following expenses are some of the deductible business expenses often overlooked;
Home office expenses are expenses relating to a workspace in your home. The space must only be used to produce income, or to meet with clients and customers. You may deduct a prorated amount of the following house costs;
1) Utilities (gas, power, water)
2) Home insurance
3) Mortgage interest
4) Repairs and maintenance
5) Property taxes
The portion of the expenses considered deductible is based on the ratio of total square footage of the workspace in comparison to total square footage of the home. For example, assuming a 2,000 sqft home had annual deductible expenses of $5,000, and the office is 200 sq. ft, the total deduction would be $500 (200sqft/2000sqft * $5K). It is important to note that claiming a capital cost allowance is allowed on a home office, but is not recommended as it would impact the principal residence exemption should the shareholder decide to sell their personal home. This could end up being costly in the long run due to potential capital gains that would be taxable in the hands of the shareholder.
Bad debts should be supported with documentation. The documentation should show that all measures of collection on the debt have been exhausted and that collection of the debt is highly unlikely.
Donations are eligible for deduction but are treated differently for tax purposes from other business expenses. There are often significantly better tax benefits when making donations personally rather than through the company.
Licenses, dues and fees relating to annual licenses, business taxes, commercial memberships, trade group membership, etc are eligible deductions. An important note is that club membership dues relating to dining, recreational activities or sport (ie. golf) are not deductible for tax purposes.
Interest and bank charges are for the most part deductible. It is important to note that interest and penalty relating to federal and provincial taxes are not deductible. It is best to separate out interest and penalty relating to government when preparing your bookkeeping.
Meals and entertainment can be deducted up to 50% for tax purposes. It is important to note that these meals must be for the purpose of earning income. GST on meals and entertainment is also only claimable at 50%.
Subcontracting costs which are paid to subcontractors are considered deductible expenses. Please note there is additional filing requirements related to payments made to subcontractor providing construction services. CRA requires an annual information return to be filed stating all payments made to construction subcontractors.
Telephone expense paid on phone and fax lines for a business space and used specifically for business purposes are fully deductible. These telephone expenses may include a home phone if the company office is located in the home.
If the vehicle is owned by the corporation, ensure that all receipts are maintained and that a mileage log is kept. This mileage log should include the date of travel, the number of kilometers and the purpose of the trip. Receipts that should be kept include;
2) Oil and maintenance expenses
3) Repairs and maintenance
4) License and registration
The expenses are deductible on the vehicle up to the percentage amount that the vehicle is used for business use. If the vehicle is owned by the company and used personally, it is important to note that a personal benefit will be charged to the driver for their personal use.
If the vehicle is owned by the shareholder or employee and used for business, CRA allows a per kilometer allowance to be deducted in the business. In 2015, the rates are 55 cents on the first 5,000 kilometers and 49 cents on each additional kilometer. Using this method, a mileage log must also be kept to track the business kilometers driven but individual receipts for gas, oil, etc. do not need to be retained.
The last item to note is that personal expenses paid by the company or cash draws from the company are not deductible to the company. These transactions must be recorded to the shareholder loan and repaid within a 12 month period.
If you would like more information or have any questions, feel free to contact us at 780.466.6204, or click here to send us an email.
Thanks to Richard Ouellette of KWB Chartered Accountants for providing this content.