Owning a business comes with a major responsibility of paying taxes. Handling taxes involves a variety of factors including determining the appropriate tax brackets, calculating the taxable income, and identifying potential tax deductions. Business owners, who just entered the entrepreneurship league, get baffled about tackling business taxes. We give you a brief guide to help you understand business tax and identify beneficial deductions.
Which Canadian Income Tax Return is Appropriate for your Business?
The process of filing and paying taxes vary depending on the legal structure of your business.
Sole proprietorships report their income on the owner’s personal tax returns. If your own one, use the Statement of Business Activities or Statement of Professional Activities to report and file your business income tax returns. In taxation, business includes any trade, commerce or manufacturing of goods with the aim of earning profits. While profession includes services provided by professionally or technically qualified individuals, such as doctors, lawyers, accountants, etc. Depending whether you are into a profession or a business, you can choose the appropriate form. A tax consultant can help you select an appropriate one.
Partnerships are owned by two or more individuals. In a partnership, each owner or partner reports his or her share of the partnership’s net income or loss. This applies whether you receive your share in cash or credit to a capital account. Partners also use the Statement of Business Activities or Professional Activities to report their income.
Corporations are required to file a corporate tax return. A corporation is a separate legal entity, where all transactions are conducted and managed separately from the owners. Hence, it needs to calculate and file its own Canadian tax returns. Corporations use the T2 tax return form to file their tax returns.
Identifying Tax Deductions
Tax system not only takes away a part of your income but also offers you benefits in the form of deductions and credits. As per the Canadian Revenue Agency (CRA), deductible expenses are valid only when they are incurred for the sole purpose of earning from the business. Identifying and availing these deductions can help you minimize your tax burden substantially. Here are some business expenses that qualify for deductions.
General Business Expenses
Expenses incurred on a day to day business with the sole purpose of earning income can be claimed for deductions. This includes common expenses like heat, electricity, water, telephone and internet connection used for business activities. Such administrative expenses can also be claimed by home-based businesses.
Other Capital Expenses
Capital Costs Allowance offered by the CRA covers expenses related to assets and properties that have a long-term value. Since capital expenses are related to long-term assets and their purchase cost cannot be applied against business income, you must calculate and claim the depreciation expense on these assets.
Apart from these, there are various other expenses that can be claimed for deductions. This includes expenses incurred in scientific research and development, acquiring property, expenditures related to mortgage interest, gifts to employees, and costs incurred in Registered Retirement Savings Plan (RRSP) and Private Health Services Plan (PHSP).
Calculating taxes and filing returns are a complex procedure that needs thorough knowledge and understanding. Moreover, business owners often overlook potential deductions and miss out on these benefits. Hence, it is recommended to take the help of business tax experts so that you avail maximum benefit and file tax returns in compliance with the legal tax structure.