A Beginner’s Guide to Small Business and Tax Saving
Debbie Bongard - Jul 05, 2019
As a small business owner, you must understand the reality of "every penny counts". Why, then, would you pay more than you need to in taxes to the government? Here are a few easy tax-saving strategies that will allow you to maximize the value of your
Starting a business is hard. The significant financial pressures that accompany costs of start-up and operation typically leave small business owners with very small profit margins (if any) and a great deal of emotional exhaustion. If you are a small business owner, you must understand the reality of “every penny counts”. Why, then, would you pay more than you need to in taxes to the government? A recent survey by Forbes showed that 93% of small business owners over paid their taxes in 2018. Smart tax practices allow you to have more cash to invest back into your business, and are essential to maximizing the value of your business. Here are a few easy tips and tricks that can help you better manage your taxes and result in greater tax savings.
Tax software is your new best friend. There are many great tax software options, including UFile and Turbotax, which allow you to better manage your taxes. The software combs through old receipts and expenses to identify items eligible for deductions. That being said, it is also crucially important that you maintain your expense records by keeping track all of your receipts. There are also many easy-to-use app that can help you organize your daily expenses. These apps allow you to import receipts, forward email invoices to the appropriate folder, and sync expense information with your tax filing software. Embracing tax and expense management software will only make your life easier.
Income-splitting. This is one of the most common ways that small business owners cut taxes. By splitting your income with family members, you fall into a lower tax bracket and will have to pay less income tax. In order for this to be legitimate, there must be proof of employment through paperwork, and your family member must be paid a reasonable salary. For example, it would be a major red flag if you employed your son or daughter as your secretary but paid them $100,000, as this is substantially greater than the industry standard.
Take part of your pay in dividends. There are a couple ways that dividends can provide you with tax advantages. Firstly, if you take part of your pay in dividends, your income can be taxed at a lower rate, given the lower tax bracket you fall into. Further, Canadian taxpayers who hold Canadian dividend-paying stocks can be eligible to receive a dividend tax credit. This tax credit means that dividend income is taxed at a substantially lower rate than if the same amount was reported as regular income. For example, in 2019, if you fall into the highest tax bracket your income would be taxed at 50%, whereas the tax you would have to pay on dividend income is only 29%. Taking part of your annual income in the form of dividends can provide you substantial tax savings.
Deduct your home office. If your home workspace is the principal place where you conduct business, meaning more than 50% of your business is conducted there, you can deduct some of your home’s expenses. Your tax software can help you determine what portion of your home is dedicated to work space and what percentage of your expenses are eligible for tax deductions. Some potential deductible expenses related to your home office include insurance, property taxes, mortgage payments, home maintenance and repairs, internet and other utilities. Even cleaning supplies can be eligible for tax deductions.
Save for today and for the future at the same time. Putting additional money towards your RRSP or other retirement accounts can help to reduce your current taxable income if you are self-employed. This is an effective way to defer your taxes as this money won’t be taxed until the funds are withdrawn from the account upon retirement.
Penalty relief. Mistakes happen – you are only human. If you do make an error in filing your taxes or you fail to make a payment on time, you may be subject to a taxpayer penalty. If this is the case, take a look at this website to assess if you are eligible to have your penalty cancelled or waived, in whole or in part. Some circumstances that warrant relief include serious illnesses or accidents, serious emotional or mental distress, natural or human-made disasters, and civil disturbances or disruptions in public services. Although the penalties don’t tend to be outrageously high, every penny counts.
Protect your assets. This last tip does not deal with taxes but is important to mention, nonetheless. Given the considerable risk associated with starting and owning a small business, it is a smart to be proactive in protecting yourself from total liability if something goes wrong. There are two common ways of doing this: incorporation, and creating a separate business for your real estate. By incorporating your company, your business will function as a separate legal entity, meaning that your personal assets (i.e. home, car, savings, etc.) will be protected if your business goes under. Secondly, if your business owns property, you could consider creating a separate company that owns the real estate assets. This essentially will ‘creditor-proof’ your business by ensuring that your assets are separated, and therefore untouchable, if your business fails.
We hope that these simple tips and tricks will help you in making sure that you aren’t paying more in taxes than you should be. By utilizing any number of these tax saving strategies, you will not only have to pay less taxes, but also have more cash on hand to invest back into your growing business. If you have any additional questions surrounding financial planning and taxation for small businesses, please do not hesitate to reach out to any of our expert wealth advisors here at Bongard Wealth Advisory Group. We are here to help.