With the holiday season fast approaching, year end tax planning may not be the first thing on any business owner’s list but once the holidays end, tax season will creep up sooner than you think. Being prepared for tax season will help limit any unexpected costs when you complete your tax returns.
Businesses commonly use the end of the year to re-evaluate their goals and finances. As a business owner, it is important to plan the moves you make throughout the year and plan for the following fiscal year. When planning your tax, it is advised to identify aspects that performed well and areas that need improvement to help position yourself better. Here are five tips to help you position yourself better when conducting year end tax planning for your business this year.
What is Tax Planning?
Tax planning is the activity of assessing your current financial position and creating plans to help reduce tax liability by utilizing all available tax deductions, exclusions, and allowances. This process is important for all business owners to undergo to ensure they are in optimal condition for tax season. It is recommended to discuss tax planning with a CPA to ensure what tax planning is in line with your province’s laws and regulations.
1. Plan Your Purchases for Year End Tax Planning
One advantage of owning a business is the expenses you can write off or use as an asset to help balance your taxes. However, purchases for depreciable assets should be made before the end of the fiscal year to maximize the benefits you can receive. The asset must be in use in the current fiscal year it is purchased in order to claim Capital Cost Allowance (CCA) to reduce your income.
Capital Cost Allowance (CCA) is the annual deduction you can claim for the depreciation of certain property, furniture, or equipment used in your business. Governments provide these deductions because the properties can wear out or become out-of-date/obsolete over time.
Due to the process of depreciating assets, you cannot deduct the full amount in the same year you acquire the property, but rather the deduction amount is calculated over a period of time.
If you have plans to sell your capital assets, you may want to wait another year to claim an additional year of CCA. There are also incentives available such as the zero-emission vehicles incentive and accelerated investment incentive.
2. Take advantage of small business deduction
A corporation can pay less in a taxation year with a Small Business Deduction (SBD). To qualify, a business must be a “Canadian-controlled private corporation” (CCPC) earning an active business income of up to $500,000. However, passive investments can limit how much you receive from a Small Business Deduction.
3. Hire your family
Did you know that hiring your family can help you divide up your income? When you hire your spouse or children to work for your business and provide a reasonable salary for the work they complete, this becomes a tax-deductible expense and it decreases the total business income you’ll be taxed for and you’ll help keep your income in the family.
4. If your employees work from home, be prepared to fill out T2200/T2200S forms
Many workers transitioned to working from home due to the pandemic and eligible WFH employees could claim a home office expense deductible. However, in spite of the gradual return to in-person for some and the hybrid working arrangement for others, the government has promised to allow remote employees to use the temporary simplified method for claiming a home office expense deductible for an additional two years.
5. Keep track of all government assistance you receive as a business owner
During the pandemic, the government of Canada offered some subsidies, grants, and emergency funds to support businesses. Many business owners applied to help support their employees, cover inventory loss, and sustain their business. However, some money received through government assistance programs is considered taxable income. This point is important to consider when planning your taxes and managing your business’ cash flow. You also must report it as “income or as a reduction of an expense“. How you report/claim it depends on the type of grant or subsidy you receive.
The information we provide in this post is general and nuanced. We advise you to consult with the law and a professional to ensure you are doing your tax planning correctly.
Need help with tax planning?
If you’d like help to plan out your taxes at the end of the year, it is important that you use a professional tax accountant. Regularly keeping up with your income, expenses, and other financial needs is important to ensure your investments are kept safe.
At Soleimani Accounting, we specialize in providing professional accounting services for small businesses and corporations. From bookkeeping and accounting to tax, we are here to help your business thrive through sound financial advice and assistance. Get in touch to book a free 30-minute consultation.