Write Offs: The Ins and Outs of Business Deductions
Can this be deducted through my business?
It’s a great question that business owners ask time and again. But…it doesn’t always have a black and white answer. Yes, you can deduct any reasonable current expense that helps you earn income—but, there’s criteria that can help make determining deductions a bit easier. So, to help you better understand what can and cannot be written off, there are three key learnings to guide you.
Learning #1: What you want to deduct needs to be reasonable.
There’s no clear definition on what is considered “reasonable,” but there are criteria to give you a sense of what it may entail. Typically, home offices can be deducted if you have a home-based business. If you are a chef and your office is the kitchen, it would be reasonable to deduct kitchen equipment required for your business. However, things such as renovations are a bit trickier when it comes to deductions. If you have a home-based business and you decide to do renovations to your bedroom, the renovations could not be written off. While that may seem intuitive, it’s important to know the boundaries of deductions.
It’s key that what may be reasonable for you and your business will be unreasonable to someone else.
Our advice? Always keep your receipts and any documentation on items that you write off. This will keep you organized if the Canada Revenue Agency (CRA) asks for documentation to clarify certain deductions.
Learning #2: Understanding which expenses are current vs. capital is imperative.
Here’s a small accounting refresher: current expenses are those that will be spent within the current tax year. This includes fees such as monthly Internet charges, rent payments, and membership fees. Capital expenses are those that depreciate and lose value over its lifetime. For example, large machinery or vehicles.
Why should you care? Because current and capital expenses are deducted differently. Let’s break it down.
With current expenses, you can write off the whole payment only if it relates to the current period. It’s crucial to understand that these expenses must be current.
Deducting capital expenses are a bit more intricate. Say you have purchased a $30,000 service truck—a capital expense—for your business. You use 30% of the truck for business purposes and 70% for personal use. In the first year, you can write off 30% of the initial price paid, which is $9,000 ($30,000 x 30%). The following year, you will be allowed to deduct less than the first year since the truck has depreciated a certain amount in its first year of life. This process continues until the item is depreciated to zero.
Current and capital expenses are not the same, and it’s necessary for business owners to distinguish between the two.
Learning #3: There are other expenses that can be deducted—it’s just more subjective.
This is the grey area we mentioned earlier. Other expenses that are imperative to running your business can also be deducted, such as marketing, meals and entertainment. The hiccup? You need to be able to prove to the CRA that it was used for your business.
For instance, if you take a client to a Calgary Flames game, the CRA could argue that this was for personal enjoyment rather than for business purposes. Note how you document that this was a business expense.
If you’re travelling for business and you write off a meal that you purchased at the airport, that could be valid. At the end of the day, you need to be able to prove why and how what you’re deducting was used in your business to generate revenue or income. So again, we urge all business owners to keep documentation and receipts of all expenses, especially those that are subjective.
You don’t have to have all the answers. If you’re unsure if an expense can be written off or not, we encourage you to speak to a bookkeeper or business advisor. If you’ve discussed it and you understand it, then you’re in a much better position to know what you can and cannot deduct and why. That will make conversations with the CRA occur much more seamlessly.
We want to ensure business owners are aware of some of the risks with deductions and how to address them. If you’d like to chat more about business expenses and deduction criteria, feel free to contact Priority Business Solutions today.
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