Tax tips for home businesses

From Toronto Star:
By Linda A. Fox

If you operate a small, home-based business, you are trying to get the most out of every dollar you bring in. Figuring out how to maximize tax deductions is one very important aspect of the business's financial plan.

Small, home-based businesses present a number of opportunities for income tax planning that, if not dealt with properly, can cost the owner money.

Many such businesses are operated out of the owner's home, for reasons of cost as well as avoiding a commute and being able to care for small children while still working.

The Income Tax Act specifically provides that expenses incurred for the purpose of earning income may be deducted for tax purposes, so the owner must remain on top of all the costs that are being incurred. Getting good financial advice is the key.

Chartered accountant and small-business specialist Jerry Paskowitz, a partner in Sloan Partners LLP of Thornhill, warns that many home-business costs are hidden.

"For example, rent paid for a residential apartment or the mortgage interest paid on a house may be deductible," said Paskowitz. "The criterion would be whether there is space dedicated to the operation of the business."

Paskowitz cites the example of a person selling giftware from her home.

"Let's say the proprietor has inventory stored in a third bedroom and is also using that space to keep the business records. Customers also go to that room to see the merchandise and place orders," Paskowitz explains. "In that case, the owner would determine the portion of the home being used for business purposes as a percentage of the total space, and apply that proportion to the mortgage interest to determine the allowable expense. The same rationale would be used for other related expenses, such as maintenance costs and utilities."

Other allowable deductions would be the expense of stationery and supplies, as well as the business use of a vehicle.

"One question that arises quite often is whether a business owner can employ his or her spouse," said Paskowitz. "The short answer is that any person who provides services to the business, whether related or not, can be paid. That also includes children. The consideration is that services provided should be documented and paid for at a reasonable rate. There is terrific opportunity for the unaware to miss out on legitimate claims by forgetting to compensate spouses for work performed."

When paying a family member or spouse, no tax is paid on income up to $8,000, and those who receive the money can make RRSP contributions, which can benefit the family.

Other allowable expenses include travel, if your trip is deemed for business purposes; insurance; cellphone and land line telephone bills. Meals and entertainment expenses are restricted to 50 per cent of the amounts paid.

If the business acquires capital assets such as computer equipment, furniture and fixtures, depreciation — "capital cost allowance" in tax-speak — is deducted at rates determined by the Canada Revenue Agency, or CRA.

Some types of expenses, such as those incurred in acquiring advanced knowledge, may be treated as business expenses while some may be deemed tuition, depending on the circumstances, said Paskowitz.

"For instance, attending a certification course required by a manufacturer before being allowed to sell a particular product will be treated as a business expense, but attending a college night course to gain advanced knowledge of a software program is most probably tuition," he says. "In either case, they would be allowable deductions in the computing of taxable income."

A final word of advice from Paskowitz is to read the related tax paperwork. "To assist in the planning, business owners and prospective owners should look at tax forms T2032 (for service businesses) and T2124 (for product-based businesses) and read the CRA guides to these forms to get an understanding of the tax treatment of home-based and small businesses."

If you are unsure of what to do, get help. Most initial consulting visits to accountancy firms are free. Do your homework, choose someone with a recognized accounting designation for assistance, and put all your questions in writing.

Just take a quick look around your home. If you have a room set aside as an office; if you have furniture and equipment, computers, phones, a car and employee relatives, chances are you have things you can write off to maximize business tax deductions.