Save Your Business Money with These 3 Tax Strategies

Strategy #1: Claim the deductions your business is eligible for – The Canadian Revenue Agency (CRA) and the Internal Revenue Service in the US (IRS) have many deductions a business owner can claim on their returns. Devising an effective tax strategy involves knowing which deductions your business can claim. The following are two common deductions that I, along with many other small business owners, take advantage of at tax time in April:

1.)   Home Office ExpenseIf you have a home office (den, basement, bedroom, or confined space used exclusively for work), then you can deduct a portion of your office expenses relative to the area used in your house. For example, Michelle has $50,000 in office expenses for the year. Her office takes up 15% of the square footage in her house. Michelle can deduct $7,500 ($50,000 x 0.15) on her return by having a home office. Based on my experience, I would say 15%-35% of your house is a reasonable percentage for business use. Some common expenses that you can claim by having a home office can be:

–        Utilities

–        Mortgage interest

–        Property taxes

–        Repair and maintenance

–        Home insurance

2.)   Car Expenses

Do you have a car and use it for work purpose? If so, you are entitled to claim a deduction on the portion used for business use, such as driving to and from work or driving to meet clients. The CRA and IRS allow you to deduct the following expenses related to your car:

–        Fuel and oil

–        Insurance

–        Lease payments

–        Depreciation (if you own)

–        Parking

–        Repair and maintenance

–        Toll charges

–        Vehicle registration fees

Strategy #2:  Take advantage of income splitting opportunities – Both Canada and the US use a marginal tax system, which means that the more money you earn, the higher your tax bracket. Because of this, if you can split your income with a family member, you will be able to reduce your income and pay less tax. Splitting income essentially means that the business income is shared between you and others in your family, rather than going to you alone. I’ll walk you through some examples, as well as some speed bumps you will need to overcome before the CRA or IRS will allow you to use this tax strategy.

Strategy #3: incorporate your small business if it will save you money – When planning your tax strategy, a decision should be made about whether you should incorporate. To answer this question you must decide if doing so will really benefit your business. Here are a few questions you should consider before incorporating:

–        Does your business have sufficient profits to justify the costs associated with a corporation?

–        Are there any tax savings for you by incorporating?

–        Does your business take part in complex transactions, making it susceptible to errors and omissions in its financial statements?

Now that you have more details on how to save money on taxes with your own business you should be ready to file.

Article Source: Fresh Books

Image Source: John on Flickr