Seven Small Business Tax Questions
Tax season can be an especially taxing time for small business owners, many of whom have unique and complicated sources of income. It’s often hard to avoid getting bogged down or distracted by the stress of filing all the appropriate paperwork, staying on top of tons of tiny details, and making sure there’s enough money on hand to pay your bill.
If you’ve got questions about the tax status of your small business, check this list of common small business tax questions to see whether we can provide some answers and help relieve a little bit of stress.
What are the important dates to remember?
Different types of business have different dates for filing tax returns and paying outstanding balances. If your business is a sole proprietorship or partnership whose fiscal year ends on December 31, you must pay your taxes by April 30 in order to avoid penalties. If you or your spouse is self-employed, however, you don’t actually have to file your return until June 15.
Different dates apply if your small business is a corporation, in which case your taxes are typically due within two months after the end of the tax year, or the fiscal year end. However, a corporation that’s Canadian-controlled and claims the Small Business Deduction has three months to pay.
What if I don’t file on time or can’t pay my bill?
Failure to file your taxes by the appropriate deadline will result in a penalty fee being charged. This fee is five percent of the balance owing, plus an additional one percent of the balance for each full month that your return is late, up to a maximum of 12 months. If you’re a repeat offender when it comes to filing late, the penalty fee may be higher.
If you have a legitimate reason for missing the filing deadline, you may be able to avoid paying the penalty. Contact the Canada Revenue Agency (CRA) to inquire about Taxpayer Relief Provisions.
Even if you don’t have enough money to pay your full tax bill, you should still file on time. Once you receive your Notice of Assessment, indicating the amount owing, contact your local tax office to work out a payment schedule. You’ll want to do this as soon as possible – the CRA charges daily compounding interest on all unpaid tax balances.
I work from home. Am I eligible for special deductions?
If your home is the primary location of your small business, you can claim a portion of your mortgage interest (but not the principal) or your monthly rent as a home office expense. Additionally, you may also claim a portion of your costs for utilities such as heat and electricity, home insurance, property tax, and repairs. The eligible amount of your deduction is determined by the square footage of the area you regularly utilize for business reasons, whether it’s office space, or a meeting/reception area for clients or patients.
I drive a lot for business. Can I claim deductions for that?
If you use your car for reasons related to your small business, you can claim a portion of automobile-related expenses such as gasoline, licence fees, insurance, lease costs, and maintenance. However, it’s important to note that you need to plan ahead in order to ensure your deductions are approved. The amount you’re permitted to claim is directly related to the number of kilometres you drive for work purposes. In order to keep track, you are required to keep a logbook of your trips, including the vehicle’s odometer reading on the first and last day of the tax year. Each time you travel for work, enter the date and distance travelled, as well as the address of the location you’re visiting and the business reason for going there.
I do a lot of entertaining for my business. How much can I claim?
If you regularly take clients out to dine or entertain them in some fashion, you can typically claim 50 percent of the cost for meals, beverages and entertainment expenses – it’s actually 50 percent or a ‘reasonable amount in the circumstances,’ whichever is lower. It’s possible to deduct 100 percent of food, beverage, and entertainment costs as long as they’re purchased for a staff event, such as a Christmas party, and as long as you invite all the employees from that particular location. You can still claim the same deductions if you invite customers and clients to such functions, as long as your staff is also invited.
What should I do if I have business losses?
If you’re a sole proprietor or a partner whose expenses are greater than your income, you have what’s called a non-capital loss. These losses can be used to offset income from other sources within a window that extends three years backward and up to 20 years forward. Consult with your accountant to decide when you would benefit most from applying the non-capital loss. If your small business is a corporation, however, you won’t be permitted to write off losses against income from other sources.
How long am I required to keep business records?
If you’re self-employed, you’re more likely than most taxpayers to be audited, so make sure you keep detailed records and hold on to all your business-related receipts. The CRA can decide to audit you several years after the fact, which is part of the reason it requires records, both paper and electronic, to be preserved for six years. Records still need to be kept even if you’ve closed your business for one reason or another.
Once the appropriate amount of time has passed, you may wish to have your records shredded for privacy reasons – it’s the best safeguard against the threat of identity theft. If you want to dispose of or destroy your records sooner than the six year period, you’ll need written permission from the CRA in order to do so.
Need a place to dispose of your sensitive documents? Participating The UPS Store locations offer a paper shredder and locked bin option for you to dispose of your personal and business documents. Contact The UPS Store near you to learn more.