What Every Small Business Owner Needs To Know
You have a great idea. You’re going to start a business. You’re going to take the leap. You’ve got this.
What do many entrepreneurs have in common? Drive. An expertise in their business. An unwillingness to accept failure.
And an unwillingness to accept help. Sometimes because of cash flow. Sometimes out of a desire for keeping control of your business.
I am offering you help. Use this resource as you need. Your only investment is a bit of reading time.
After working with many entrepreneurs I find that the knowledge of business taxes is not very strong. I get it…you can’t know everything. There are some things that you need to understand. It’ll help you plan. It’ll help you when you‘re talking to the accountant and bookkeeper you eventually hire.
HST/GST: This sales tax is only required if you are registered. And you do not have to register until you reach a certain size ($30,000 sales). There are rules about when you charge and how often you claim. Here are some things that I find are common misunderstandings of this tax:
Once you are registered, it’s forever (not Impossible to deregister not easy). If you have a year where sales drop below $30,000…. Yes you still charge the sales tax.
Meals and entertainment only has 50% deductibility. Same is true of HST/GST. So if your bill has $10 of HST/GST you can only take $5 as your ITC.
This tax does not replace income tax. While the same books and records are used to calculate this return…they are different taxes. You need to remember as you collect HST/GST from your customers, set it aside. You are doing a service for the Feds. This is not your money.
The HST/GST that you spend can be deducted from what you collected. This does not include your household or business use of vehicle expenses. You only get a % of those costs on your income tax return…you do not get 100% on your HST/GST return.
INCOME TAX: Starting with the basics, there is a difference in how your business pays taxes depending how your business is registered.
Corporations. File a separate income tax return from the business owner.
Sole proprietors. Business income is part of your tax return.
The basic rules remain the same. And while there may be some industry specific discussions — the basic rules prevail.
No personal costs. It’s doesn’t matter what your neighbour’s brother heard from his golf caddy… personal expenses are not part of your bookkeeping. Now if you are using your car or your home for the business there MAY be some deduction. Discuss with your CPA.
You need receipts. The CRA can review your income tax (or HST) return to justify your values. You need proper bookkeeping so that you can show the tie in to your return. The CRA will ask for some receipts (often the biggest ones but sometimes random as well to keep you on your toes). Without the itemized receipt— with business justification— it will be disallowed. Electronic receipts are becoming more widely accepted and are a great way to ensure you don’t lose details to fading, fires, floods, bad filing etc.
Regardless of which return your are working on the truth is….file on time. The penalties for filing late are significant. And these are not a good use of your business money. These penalties are not deductible and are meant to punish. Even if you think you cannot pay the full amount you will owe…file on time. You will still pay interest but at least it is it compounded by paying interest on top of a penalty. Some other terms you may hear:
Instalments may be required. These are payments towards what you are expected to owe next year. When your tax preparer explains this is what you owe and instalments are needed that means: pay this year and start to pay towards next year. With limited exceptions….the most you will ever be refunded is the tax you paid. So if your business did not pay instalments there is unlikely a refund in your future.
Tax Credits are adjustments made to the amount of tax you will owe. When the credit is non-refundable then once you use up what is needed to make the tax owing zero, you can’t use more credit. If it is refundable, then you can generate a refund based on this credit. The refundable credits are less common.
Tax Deductions are deducted from income to reduce taxable income. This will save you tax BUT the savings are not 1:1 like you may think. For example, if you spend $100 on your business you may only save $20 in tax (actual savings will depend on your tax bracket).
So those are the basics. Things I found myself saying many times through this last tax season. My goal is to help you, the business owner, learn some basics so that you can ask your CPA, your bookkeeper or anyone else helping with your financial health, great questions. Moving your knowledge base from a novice to intermediate gives you the edge to plan your taxes. Waiting until the return is being drafted is too late to impact the result.