Many Canadians are now operating their own business, and most of them do so from their own home. If you’re one of these Canadians, you’re going to want to start managing your taxes to reduce the amount of taxes owing related to your new venture. There are number of important deductions that you should remember when preparing your business taxes. Here are some of the most common:
Business use of Home
Home based business use of home deductions are generally the largest deduction available to most business owners. You can claim these expenses if your home is your principal place of business or you earn income by using the space to regularly meet with clients, such as a hairdresser that cuts hair within their home.
The deduction is a percentage of your total home expenses. You can calculate the percentage by taking the square footage of the space in your house specifically devoted to business use. Let’s say, for example, you have a one hundred square foot office that you use exclusively for business purposes. If your house is one thousand square feet, your business use of home deductions will be 10% of your household costs.
These household costs can include utilities, telephone and internet costs (a dedicated business line can be deducted in full), and household cleaning supplies. In addition, if you are a home owner, you can claim both your property taxes and mortgage interest. Note that this does not equal your mortgage payment; you can only claim the interest component, not the principle payment. You should check your annual mortgage statement provided by your bank or mortgage broker for the split between these two amounts; it will vary year to year.
If you are a renter, you can claim the business use percentage of your monthly rental cost.
You cannot deduct these expenses, however, from income that your business does not have. If your business is operating at a loss, you cannot claim these expenses, and if you’re operating at a profit, you can only claim these expenses to the extent that you do not create a business loss. These expenses can be carried forward to the next business year, however.
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It is important to note that you can only claim vehicle costs that are applicable to the business use of the vehicle. The Canada Revenue Agency recommends that you keep a mileage log of all vehicle usage, so that you can determine what percentage of the vehicle usage is related to your business. Once you’ve determined this percentage, you can then apply it to your total vehicle costs to determine your deduction.
These total vehicle costs include regular maintenance, fuel and repairs. You can also claim the interest used on any vehicle financing, again, claiming only the percentage of business use. This also applies to lease payments.
Commercial insurance premiums can be deducted from your business income. This would include premiums on equipment, tools or specific buildings used in your business activities. Home insurance premiums can also qualify, but only the portion equivalent to the percentage of your home used specifically for business use.
It should also be noted that life insurance and other owner specific insurances are not deductible from business income.
As you can see, there are a number of deductions available for those running a business from their home. Using these deductions effectively will ensure that you pay the least amount of tax possible on your business income.
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