Operating a business is tough enough without having to pay more than your fair share of taxes. Here are five easy — yet often underutilized — tax-cutting strategies for small-business owners:
Save on family EI: Many small-business owners know the tax benefits of paying salaries to family members. However, they often forget the rules concerning employment insurance premiums on those salaries. In many cases, family members would not be eligible to collect EI if they lost their jobs. If they can’t collect, why pay the EI premiums? This can mean thousands of dollars in savings yearly.
Making interest deductible: Complicated new rules govern the deductibility of interest, but the basic tenet remains the same: to deduct the interest on a loan, the loan must be taken out for business purposes. So, if you have a personal loan (on which interest is non-deductible), you might pay it off with funds from your business, then take out the equivalent amount as a business loan (on which the interest is deductible). Similarly, in cases where you have concurrent business and personal loans, dedicate available funds to paying off your personal debts.
Deduct all business expenses: It sounds obvious, but many entrepreneurs fail to deduct business expenses, fearing those costs will be disallowed because the business fails the “Reasonable Expectation of Profit (REOP)” test. However, recent decisions by the Supreme Court of Canada have forced Ottawa to change its thoughts concerning REOP. As long as there is no personal element to your business, your business losses are tax deductible.
Know capital items from expense items: Treating a capital addition as an expense could expose you to additional tax, interest and other penalties and prevent you from fully deducting your purchase for years. The rules in this area are very lengthy and complex, so when in doubt, find out: contact the CCRA or seek professional assistance.
Incorporate — maybe. Under the right circumstances, incorporation can save thousands of dollars a year for a small business. Under the wrong circumstances it will only cost you money and administrative headaches. To know when to incorporate from a taxation point-of-view, ask yourself this simple question: “Can I personally afford to leave some of my company’s profits in the business, thus deferring that income?” If the answer is yes, then incorporation may be for you.
Stephen Thompson, CA, CFP is the author of BEAT THE TAXMAN: Easy Ways to Save Tax in Your Small Business, published by John Wiley & Sons. The book is available at bookstores throughout Canada. Retail price $24.95.
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© 2003 Stephen Thompson