Tax filing has haunted small business owners for years. Complex tax laws, delayed tax filing, incomplete knowledge of deductions and improper documentation make taxes expensive and stress business finances. But you can avoid this stress by making tax planning a routine instead of leaving it for the month of April.
5 Habits To Help Small Business Owners Make Tax Filing Easy
Adopting some good habits can go a long way in reducing the financial burden of paying taxes and also make your business tax-efficient.
Small Business Owners Should Have a Separate Current Account for Business
When starting a new business, the most common mistake entrepreneurs make is use their personal bank account to do the business-related transaction. It might work when your business is just a one-person company and transactions are small. But it could become problematic as the number and amount of business transactions grow. If business transactions get recorded in personal income tax, your tax bill could skyrocket as personal income is taxed at a higher rate.
Hence, it is a good habit to have a separate current account for business and do all business-related transactions via that account. This habit will save you the effort of segregating business and personal expenses when preparing books of accounts and avoid last-minute confusion.
Entrepreneurs Should Collect and Save All Business Receipts
The Canada Revenue Agency (CRA) allows small business owners to deduct several business expenses like travel, management, advertising, and more from their business income. Freelancers and proprietors operating their business from home can deduct rent, maintenance, and utility bills to the proportion of the house converted into the office space from their income. These deductions can reduce your tax bill significantly, but you need original receipts and records to prove they were incurred for business purpose.
Hence, it is a good habit to record the expense, collect original receipts, and file them when you incur it or at the end of the month. Remember, the CRA does not count credit card statements as proof of expense.
Another good practice is to write down the expense details behind the receipt. For instance, if you re-fuelled your car to visit a client, mention the distance, time, purpose, and the client’s name behind the fuel receipt. Such details could come in handy if you get selected for a random CRA audit.
A tip: The ink on the original receipt might fade, or physical copies could get damaged. Take a picture of the bill and store the digital copy in several places, like document storage software or your PC.
Small Business Owners Should Choose Salary and Dividend Wisely
Another good place to save on taxes is by choosing how to withdraw business income tax-efficiently. If you have family members that fall under the low tax bracket, you can withdraw money under their name and reduce the overall tax amount. But your tax treatment depends on how you withdraw the business income, under salary or dividends, as both are taxed differently.
If you opt to pay a salary to your family, it is a good habit to treat them like an employee. As we said before, keep business and personal transactions separate. If you hire your spouse as the marketing head, ensure they have the relevant experience and pay them a salary as per industry standards. Just like you would do with an employee, have all the documents in place, issue a salary slip, contribute towards their Canada Pension Plan (CPP) and deduct income tax from their monthly salary.
If salary is not an option because your child is too young or your business has not yet grown to the level to handle payroll, you can opt for dividend income. In the case of dividends, make it a habit to withdraw only a certain amount that is a believable dividend income, as it will add to your personal income tax bill.
Entrepreneurs Should Invest in Tax-Saving Accounts
When you are a small business owner, you not only plan for taxes but also for retirement. You can secure both goals by investing your salary or dividend in the RRSP (Registered Retirement Saving Plan) and TFSA (Tax-Free Savings Account). RRSP contributions are deductible from taxable income and help you save for retirement, while TFSA withdrawals are tax-free.
It is a good habit to regularly invest in stocks, ETFs, and bonds as per your financial goals through TFSA and RRSP. A professional financial advisor can help you plan your retirement savings with RRSP, TFSA, and other tax-efficient instruments.
Small Business Owners Can Save Tax From Charitable Donations
Donations made to registered charities or qualified institutions have tax benefits. Small business owners can donate up to 75% of their net income and deduct that amount from taxable income. Individuals can get a tax credit for their donations. Business owners need not deduct the entire donation amount in the same year. They can carry forward this amount for up to five years and optimize high donations to reduce taxable income. It is a good habit to regularly donate some amount to qualified charities and save those receipts. It will give your tax consultant room to maximize your tax savings.
You can use many strategies to optimize taxes and retain capital for business growth. Professional tax consultants can help you navigate tax law seamlessly while meeting all the legal and regulatory compliance to get the maximum possible tax benefit.
Contact McCay Duff LLP in Ottawa for Tax Optimization and Financial Services
A skilled tax advisor can help you plan your income in the most tax-efficient manner. At McCay Duff LLP, our tax experts can provide services to support tax filing and optimization. In addition, we can provide you with recommendations on preserving wealth in structures best suited for your business. To learn more about how McCay Duff LLP can assist you with financial planning expertise, please get in touch with us online or by telephone at 613-236-2367.