How to Avoid the 5 Most Common Tax Mistakes Small Business Owners Make – Dragons’ Den
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It’s easy to understand why entrepreneurs might dread the looming June 15 tax deadline. After all, it’s a lot harder to tally your revenue and calculate your expenses than it is to just punch in a T4 slip — and you’re much more likely to be audited, too.
Here are the five most common mistakes small business owners make:
1. They embrace the shoebox technique
“The biggest problem people have is just not being organized,” says Bruce Ball, a chartered professional accountant and national tax partner at BDO Canada. Most businesses have good records of their income, but expenses can fall through the cracks. Even people who keep every receipt might forget what they’re for.
Ball suggests using a credit card for business expenses, so you can cross-check the receipts against the monthly bills, or try writing the reason for the receipt — like the name of the client you were taking out to dinner — on the back of it.
2. They forget to write off their house and their car
“It’s important to make sure you claim all the expenses you qualify for,” says Ball. Two common oversights are home offices and cars. After calculating how much of the house your office represents, you can pro-rate your mortgage against it. Don’t forget to include property tax, hydro and water as well.
It’s also a good idea to keep a log of how many kilometres you drive for business and write off a portion of your car, says Ball.
3. They overshoot
“The [Canada Revenue Agency] actually does some statistical work on expenses,” says Ball. So if you’ve said 80 per cent of your car use is for business, and that’s high compared to others in your industry, you might be flagged for an audit.
They can also look at your personal finances, says Ball. “Even on smaller files, they can look at your personal account and see if there’s any receipts that are unexplained; they can look at lifestyle spending.”
4. They forget to charge HST
“Some people don’t register initially because they think their income is going to be low and they don’t want to bother” — but then they miss the moment when they make more and have to do it, says Ball.
5. They don’t think about the big picture
Paying taxes can be good inspiration to step back and think about if your company is set up in the most efficient way.
If family members are helping out in the business — which is common with high school or university-aged kids — it might make more sense to officially pay them a salary. “If that’s their only income, they may pay very little tax on it,” says Ball. And if your company is making over six figures, it might make sense to become a corporation.
“It gives you a chance to leave some money in the company, and essentially defer the taxes,” says Ball. And who doesn’t like that?
Friday March 11, 2016 By Vanessa Milne