Write-off of Business Expenses: Some Nuances
Rule of the game: write off as many expenses as possible within the compliance of the law.
So, you have launched your own business. Please accept my sincere congratulations! From now on, you have the right to write off expenses for this business. The next level of the game begins, and now you want to write-off of business expenses as much as possible in a legal way.
Write-off of Business Expenses: ITA – Income Tax Act
The law (ITA) is quite lenient towards entrepreneurs of any rank. You can consider your basement as an office and basically write off the same expenses as Apple. Just remember two important conditions you must meet: these expenses must relate to your business and stay within “reasonable limits.” The last condition is reflected in paragraph 67 of the ITA – the entrepreneur does not have the right to write off more than is necessary for the quality of the business. Naturally, “reasonable limits” seem quite subjective, and you can always object to the auditor: after all, who knows your business better – you or the CRA representative?
Pigs get fatter… Excessive Write-off of Business Expenses:
I just want to remind you of a good English proverb: “Pigs get fatter and hogs get slaughtered.” Again, it depends on how much you want to attract the attention of the CRA. The agency lacks specialists and enough time to check if all entrepreneurs have filled out the tax return correctly, and therefore you can “run into” an audit only if you really want it (see the proverb just above). There are, however, “risk groups,” which we will talk about in subsequent publications.
How to Track Business Expenses Properly
Your accountant can tell you directly about “accounting” (and if he can’t, change to another one).
At the beginning, it’s wise to establish it as a rule or develop a good habit of asking whether products or services you’re paying for qualify as reasonable business expenses. You should do it before every purchase.
Use your imagination, and if nothing useful comes to your mind, call your tax advisor. But even if the two of you don’t come up with anything smart, don’t throw away the receipt – you’ll always have time to do it at the end of the year.
Why Does My Business Need This Expense?
If you firmly decide that this purchase may be relevant to your business, be creative and immediately compose a short story on the topic: “Why my business needs this expense.” Then pay for the purchase from your business account (or a regular separate account you set up for your business). If you like to pay in cash, don’t forget that you must be able to prove the origin of your cash. If your business activity involves receiving cash, remember that all profits must be declared by law.
Turn the receipt over and write your “story” on the back. For example, you bought flowers. No auditor will allow you to classify this purchase as a business expense without a clear explanation. Therefore, if you write 2-3 lines like: “Gift to John Johnson for client referral (Tom Thompson, (416) 999-9999, Apr. 10, 2023), then as a result, this expense instantly becomes a “100% tax-deductible expense.” All you have to do is enter this expense either into your weekly planner or into Excel.
Finally, we note that you cannot write off all business expenses in full during the year. Some so-called “capital expenditures” require amortization – we will discuss this next time.
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