Owning a small business comes with no shortage of responsibilities and to do lists. Often, one of the most dreaded tasks is accounting. However, it is also one of the most important. Furthermore, proper accounting practices can not only help you head into tax season prepared but, can also provide you with valuable information to help reduce your tax liability and save money! Sounds like a win-win to us. Here are some strategies you can implement today to help lower your income tax.
Often, small business owners are advised to track all of their business expenses in preparation for tax season. Tracking is important, but, it’s not enough. You will also need to ensure that you have original documentation of your purchases. This means, you’ll need receipts – either paper or digital – to support your claim. Be sure to hold on to all original receipts related to expenses that help you do business. Whether it’s a coffee with a client or a new software subscription, hold on to it!
Contributing to your RRSP and TFSA are both great ways to reduce your income tax. RRSP contributions can even be saved and carried forward to the following year. Saving these contributions for a year where you are expecting a higher income can help you save even more.
If you have made the maximum allowable contribution to your RRSP, you can begin contributing to a TFSA or ‘Tax Free Savings Account’. TFSAs help shelter your income from taxes. Even better, both income and capital appreciation are tax free within the TFSA.
Donating to charity is a great way to give back but, it’s also an excellent way to help you earn tax credits. If you are looking to earn tax credits through your charitable donation, make sure that you are giving your donation to a registered Canadian charity. Donating to charities who are not registered, International charities as well as political parties will not earn you tax credits.
Small businesses must deduct the cost of depreciable property they’ve acquired over a period of years. This is done through the Capital Cost Allowance or CCA. It’s important to be aware that you are not required to claim the deduction in the year that the property was acquired. You can use as much of the CCA claim as you would like to and carry forward the rest to the following year. It is wise to carry it over it you are expecting a larger income tax bill in the following year than the current year.
Of course, we would be remiss if we didn’t touch on this important topic. Business accounting and taxes can be complicated. It is an especially daunting task to handle while you are trying to operate all other aspects of your business. In addition, you may not be aware of all of the easy ways you could be saving on your tax bill. For these reasons, we recommend hiring a certified professional accountant and/or bookkeeper to assist you in preparing for tax season and filing your taxes.