Canadian Small Business Women

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Business Use of Home Expenses

Note: This information differs slightly for employees who are required/allowed to work from home.

Many entrepreneurs love the idea of starting a business from home because now they get to claim the home expenses – or rather a portion of them – as a business expense! BUT entrepreneurs beware there are conditions to be met!

You need to meet ONE of the following conditions:

  1. It needs to be you principal place of business OR
  2. You use the space only to earn business income AND you use it regularly and on an ongoing basis to meet your customers, clients or patients.

So what does that mean?

If you always meet clients at a coffee shop, restaurants or their place of business, and never in your home, it can be a challenge to justify why you need to claim a home office.  Furthermore, if you are also expensing a secondary office space (meeting rooms, rented office spaces) justifying the need for a home office becomes even harder. Needing a place to keep your computer and files often is not strong enough.  However taking calls, doing client work, and using that room for other functions relating to contracting business can be a better justification. Note there is also an implied expectation of a separate room or dedicated work area; using the kitchen table does not cut it.

Once you have determined that your home office you can claim a percent of the following expenses:

  • Heat
  • Electricity
  • Insurance
  • Maintenance
  • Mortgage INTEREST
  • Property taxes
  • Other expenses (such as water)

It is important to also mention that the amount you deduct cannot be more than your net income; so the expenses relating to the home office cannot create a business loss. So we recommend calculating your net income (Revenue less expenses) for everything else first, then seeing if home expenses make the cut. These expenses can be carried forward with certain conditions.

When you sell your house, there will be what’s called a recapture if you have deducted depreciation on the value of the house so our recommendations is not to do any depreciation relating to your house!

 

 

 

“Behind Every Great Business is a Great Accountant”

For more information on how to keep your business tax efficient, or to get a consultation on whether you are making all the right tax choices for your business, contact Dharna CPA. www.dharnacpa.ca. Info@dharnacpa.ca

The Cost of Hiring an Amateur

Understandably as a business owner there are A LOT of expenses to start and run your business. A common area entrepreneurs try to save a little is by doing their own bookkeeping. However bookkeeping is a vital process for a business and doing this wrong can be financially devastating! If you are going to be a DIYselfer avoid the following mistakes!

  • Keep track of your personal contributions into the business! The money you invest becomes part of your cost base and one day you will need to know what this cost when you sell the business or die. Keeping track of your personal contributions into the business will also have an immediate tax impact when you want to withdraw money from the business.
  • Missing eligible deductions! You don’t know what you don’t know and that could result in you missing eligible deductions or not maximizing the expenses you are claiming. So what? That means more taxes paid (or not enough loss recorded!). This is a hard one to learn on your own and some accountants or business development centers do offer courses on exactly this.
  • Not preparing financial statements! If you are just using an excel spreadsheet and putting your expenses under the right column heading; unfortunately this is not going to be helpful. Yes you have a grand total at the end of the month, and you can use this to make an income statement, but what you are lacking is the ability to make a balance sheet. This will be of greater consequence if you ever need to ask for a bank loan, investors or want to sell the business – they will want to see a complete set of financial statements.
  • Mixing personal and business finances. If you don’t separate the activities of the business from your personal activities it will be virtually impossible for you to truly understand how your business is doing. Did you spend that money investing back into the business… or did you spend it on personal activities? Plus if everything is combined the CRA then will access everything if they are auditing you. Treat the business – mentally and physically – as a separate entity and keep a proper paper trail of activities between business You and personal You.

These mistakes are by no means the full list of common mistakes. But each of these has a significant tax impact and business impact for you often immediately and in the future.

 

 

 

“Behind Every Great Business is a Great Accountant”

For more information on how to keep your business tax efficient, or to get a consultation on whether you are making all the right tax choices for your business, contact Dharna CPA. www.dharnacpa.ca. Info@dharnacpa.ca

Employee vs. Contractor

In most cases you hire someone to work for you and you put them on payroll. You pay their taxes, CPP, EI and it is a fairly straight forward process. But what if someone comes to you only part of the time, or they are hired for a specific purpose only, how do you handle those individuals?  Many of these part-timers or “occasional” workers are being treated as contractors which means they are not going on your payroll, you are not deducting CPP/EI/Income Taxes. Instead, they are invoicing you for their time, maybe even charging you HST (which you get to claim back!), and you treat them like an operating expense vs. salaries and payroll.

So what is the big deal? In the eyes of the CRA it is a huge deal. They lose out on CPP & EI contributions and receive less income taxes too!

So how can employers help make the right choices? Ask the following questions:

  • How much control does this individual have on their own activities? If you’re dictating what they have to do (i.e. giving them tasks and deliverables and reviewing their work)
  • Do you provide the tools and equipment (computer, phone, equipment)
  • Can that individual subcontract the work or hire their own assistants?
  • How much financial risk is the person taking?
  • How responsible is the worker for their deliverables?
  • Is there an opportunity for the worker to profit?
  • Other factors such as the written contract

All of these individually and combined, as well as the stated intention, is considered in the choice of employee vs contractor.

Let’s take a look at an example:

I need help with my marketing. Person X is great for the job.

Employee à Person X is going to work from my office 2 days a week from 9-3, on my computer, I am purchasing the marketing software, there is no fixed amount of work but they will be told on an on-going basis what we need (e.g. I am telling Person X to write me 5 blogs, 2 Facebook posts with content relating to ABC), I am reviewing that content. Person X is more likely than not an employee and I should put Person X on my payroll.

Contractor à If Person X can choose to work from home OR my office until the work is done, have their own laptop and software, and I am paying them for a package of 5 blogs and 2 Facebook posts, and I approve the final content. Person X could be considered a contractor.

Each scenario needs to be evaluated accordingly. If you are unsure take a look at how similar positions are being treated.

 

 

 

“Behind Every Great Business is a Great Accountant”

For more information on how to keep your business tax efficient, or to get a consultation on whether you are making all the right tax choices for your business, contact Dharna CPA. www.dharnacpa.ca. Info@dharnacpa.ca

Common Mistakes Made by Small Businesses

You have this fabulous idea to start a business, and you go for it…yea! But then the reality sinks in that running a business is so much more than just selling your product and service. There’s HR and Marketing and IT and ugh worst of them all….accounting!

As an accountant I see small business owners making a few critical mistakes all the time. And the result is they either pay too much in taxes, do not have money to pay themselves, or worst of all go out of business.  Unfortunately accounting is as important to a small business as any other aspect of running a business; and it has a direct financial impact to your business! Here are some the top mistakes made by small business owners:

Not having a budget

You obviously do not start a business thinking it will fail, but in the beginning there WILL be more expenses than income. Until your brand and client list grows your budget is extremely important to sustain you. There will be tough calls to make but without a clear budget, you won’t know how to spread out your expenses.

Not keeping up-to-date records

A budget is fine as a guide but how do you know if you are sticking to it if you only do your bookkeeping once a year for tax time? At a minimum doing your bookkeeping quarterly (monthly is ideal) allows you to track progress and adjust your path accordingly. By doing your bookkeeping ONLY at tax time means it is often too late to make any informed decisions and corrective action.

If they walk, talk and look like an employee…they are an employee

Employee vs contractor is a huge area of audit with the CRA. Many employers will classify workers as contractors to avoid paying into CPP & EI when in reality they are employees and subject to payroll deductions. There are a few factors to consider when making this difference but a big red flag is control – who controls their work and schedule? A legitimate contractor likely will not be reporting to someone else who is controlling and reviewing their work.

Not recording all the personal contributions (properly)

If you ask most entrepreneurs how much money have they put into their business the answer is usually “a lot”…but when you ask them how much they cannot quantify it. This can have significant tax impacts when both taking money out of the business to pay yourself and when you are looking to sell the business.

 

 

 

“Behind Every Great Business is a Great Accountant”

For more information on how to keep your business tax efficient, or to get a consultation on whether you are making all the right tax choices for your business, contact Dharna CPA. www.dharnacpa.ca. Info@dharnacpa.ca

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