- by admin
- February 12, 2021
You know most of the business expenses that you can claim. Is there one that you are missing? We have tried to create a list, assuming that a quick glance at this list, particularly before filing taxes, will help you ensure that nothing has left. The list presented here is in bullet points and if want to know a little more about a particular please scroll down for a short description.
Self-employed – Tax-deductible business expenses
A self-employed is a person who is not incorporated. As self-employed you report your business income on your personal income tax return T1 general on form T2125. On the same form, you also report the business-related expenses that you are entitled to claim a deduction from your income.
If you are incorporated, you need to prepare your income statement. The information from your income statement flows to Schedule 125 on to T2 corporate income tax return.
Here is the list of common business expenses that you may be entitled to deduct from income if you have paid in the tax year or have incurred in the tax year but will be paid in the later years.
Most businesses report their income and expenses on the tax returns on the accrual method. Some professional business is allowed to use modified accrual method in which case they report work in progress. Some businesses like farmers or some commission agents may use a cash basis. Under the accrual method, you report your income and expenses in the period for which it relates to.
The number of business expenses that you claim in a tax year will also depend on if it is your current year expense or capital expenditure. You can deduct all your current year’s business expenses for tax purposes in the year you incurred them. However, if it is a capital expenditure, you incurred for your business, you will be entitled to claim it over years. Generally, this claim is called capital costs allowance or depreciation or amortization.
You can not deduct your personal expenses; you can only deduct expenses related to your business.
- Costs of goods sold and other direct costs
- Advertising and promotions for your business
- Bad debts or uncollectible amounts from your customers
- Business start-up costs whether you started your business or not
- Business tax, registration fees, license fees, and dues
- Home office expenses
- Capital cost allowance on your capital properties
- Delivery of goods, freight, and related expenses
- Fuel costs (except for motor vehicles)
- Business insurance
- Interest, bank charges, and credit card charges
- Fees, penalties, or bonuses paid for on early loan payment
- Initial loan fees deductible over five years
- Annual loan fees deductible in the year incurred
- Interest deductible on property no longer used in the business
- Interest on loans obtained against insurance policies
- Professional and legal fees
- Repairs and maintenance
- Management and administration fees
- Meals and entertainment expenses
- Meals and entertainment for long-haul truck drivers
- Extra food and beverages consumed by self-employed
- Motor vehicle expenses
- Office expenses (consumables)
- Other business expenses
- Prepaid expenses
- Property taxes for your business premises
- Rent of your business premises
- Salaries, wages, and taxable benefits provided to an employee
- Cleaning supplies
- Telephone, fax, and utilities
- Business travel expenses
- Charity and political contribution
- Moving expenses
- Research and development expenses
Details of some of your allowable business expenses
- Costs of goods sold, and other direct costs include your manufacturing costs and or your purchasing costs and other direct costs that make your goods salable. Your direct costs will also include any amounts paid to a hired self-employed contractor. We should ensure that the contractor does not fall into the category of your employee in which case you might be liable to pay to the CRA employee deductions which you may have not deducted. Please visit our blog for “Hiring an Employee” for further details.
- Advertising and promotions for your business – This may include your printing materials or your expenses related to your digital marketing. Occasional and holiday gifts related to your business can be categorized under this head. However, as per CRA if you give a random gift card or a ticket to a hockey game to your customer, that should be categorized under meals and entertainment expenses.
- Bad debts or uncollectible amounts from your customers – you can either claim an allowance based on your past history or industry standard or claim based on a specifically identified account. CRA may ask you to establish a trend for annual allowances claimed correspondences for non-collectability of a specific amount.
- Business start-up costs whether you started your business or not – include your incorporation or registration fees and professional fees.
- Business tax, registration fees, license fees, and dues – This includes all your business’s renewals fees or any association membership fees. Different types of businesses may require to obtain a license. For e.g. you need a license to sell tobacco.
- Home office expenses – the claim is limited in the tax year to the extent of your business income. You can not claim home office expenses and report a business loss. The amount of home office expenses that you are not able to claim in the tax year will be carried forward and be available to claim in the year you report business income. The claim of your home office expenses is based on the percentage of space in your home that you use for your office. Your total home expenses will be prorated to the percentage of space you reasonably considered to be using as your office space. Your home office expense includes mortgage interest, property tax, utilities, insurance, repairs and maintenance, internet, home phone, etc.
- Capital cost allowance on your capital properties – commonly known as depreciation or amortization and your claim as per rates prescribed by CRA. However, you have the option to claim a lower amount than the amount calculated as per the CRA prescribed rate.
- Delivery of goods, freight, and related expenses – Usually freight paid on the purchase of goods is categorized under your purchase costs. Your claim for costs of goods sold includes the costs of materials purchased. All freight or transportation costs incurred for selling the goods to your customer are generally included under this category.
- Fuel costs (except for motor vehicles) – This category includes fuel costs which not used for the motor vehicle.
- Business insurance – This category includes the insurance premium that you pay for the third-party liability or insuring your business properties and equipment, etc. When you or your employee are using your passenger car for business purposes the portion of expenses that is tax-deductible goes under your motor vehicle expenses. Please visit our blog “motor vehicle expenses CRA” for further details. A reasonable employer-sponsor health insurance premium is categorized under this category. If the employer, owner, or the shareholder are also included under the plan then they have to establish that they are the employee of the business. Any life insurance premium paid for the owners of the business is not tax-deductible unless the policy is assigned to a lender under the terms of borrowing.
- Interest, bank charges, and credit card charges – Interest charged by CRA on the late payment of taxes are not tax-deductible.
- Professional and legal fees – this includes fees paid to your accountant, legal fees paid to a lawyer providing consultation related to business matters.
- Repairs and maintenance of your business premises and equipment.
- Management and administration fees – you can pay management and administration fees to your holding company. It is always a good idea to have a written contract in place. You can also pay management fees to owners of the business; however, you need to ensure that there is no employee-employer relations ship exists.
- Meals and entertainment expenses – It must be reasonable and only 50% of the expense is tax-deductible. The limit of 50% deductibility also applies to your meals when you travel for conventions, conferences, seminars, etc. However, if you bill your client or customer for the food or beverages then this 50% limit does not apply to you. This limit also does not apply to your office parties when all employees of a location are invited.
- Meals and entertainment for long-haul truck drivers – You are allowed to claim 80% of your expenses incurred during your eligible period of travel
- Extra food and beverages consumed by self-employed – or you can claim a daily flat rate of $17.50. This deduction is only applicable to foot and bicycle couriers and rickshaw drivers.
- Motor vehicle expenses – please see our blog for further detail
- Office expenses (consumables) – Apart from office consumables, you can also claim your expenses for software maintenance, website hosting, and website maintenance.
- Other business expenses – if you made any modifications for disabled people, property or equipment leasing costs, expenses related to attending up to two conventions in a tax year related to your business.
- Prepaid expenses – if you’re using the accrual basis of accounting you claim your prepaid expenses in the period for which it relates to.
- Property taxes for your business premises – When you own your premises you pay property taxes and expenses you can claim under this category.
- Rent of your business premises – This includes rent and TMI for your factory, workshop, office, warehouse.
- Salaries, wages, and taxable benefits provided to the employee – This includes all amounts and benefits paid to your employees who is working for your business including the owners.
- Cleaning supplies – All cleaning expenses including any consumers are tax-deductible. You have the option to claim your office cleaning expenses under this category or you can claim under “office expenses” explained above.
- Telephone, fax, and utilities – This category includes your landline or cell or tablets including the plan costs but the tax-deductible portion is restricted to business use. You can claim your utilities here or under office expenses. Generally, a corporation claims the utility costs under a separate heading “utilities” or “office utilities”.
- Business travel expenses – which include public transportation fees by rail, road, water, or air, your hotel accommodation, and meals which in most cases will be limited to only 50% allowable as explained above.
- Charity and political contribution – You can claim your charitable deductions here. There are certain limits that apply to a corporation.
- Commission – You can pay commissions to your employee or your business associates for providing services or referring customers. When an employee gets the commission, he/she report on his personal tax return as income. Your employee may have incurred some expenses to earn his commission, in which case he may be entitled to claim those expenses. As an employer, you need to certify that.
- Moving expenses – You moved your business from one location to another and you can claim those expenses under this category.
- Research and development expenses – When you are doing some experiments with your products or services and incur some costs related to research and development you can claim those expenses under this category. You may also be entitled to various tax credits and grants under this category in addition to deducting your expenses.
RKB Accounting has expertise in cross-border taxation and has been providing accounting and taxation services for the last fifteen years in Canada and USA. RKB services include incorporating a business on both sides of the border, bookkeeping, sales tax, payroll, and corporate and personal income tax. RKB’s expertise includes cross-border tax planning, long-term tax planning, helping business start-ups, business structure planning, and resolving complex tax matters. RKB a CPA(Delaware), CA(India), and CIA(USA) has over 25 years of experience in accounting and taxation in dealing with various countries in the world.
Disclaimer: Information in the blog/post/article has been presented for a broad and simple understanding. This is not legal advice. RKB Accounting & Tax Services does not accept any liability for its application in any real situations. You need to contact your accountant or us for further information.
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