The life of an entrepreneur can sometimes be overwhelming when it comes to accounting, corporate tax filings and other tax matters. Before I became an accountant, I was an owner of a small business. On top of worrying about running a successful business, I would always wonder if I missed any deductions or if I was paying too much in tax. As an accountant, I’m here to share my tax tips for small business.
4 Tax Tips for Small Business
Claim Home Office Deductions
Many small business owners are not aware that they can claim a portion of their household expenses if they work from home and meet one of the following conditions:
- The work space is where you mainly (more than 50% of the time) do your work.
- You use the workspace only to earn your employment income. You also have to use it on a regular and continuous basis for meeting clients, customers, or other people in the course of your employment duties.
These expenses include rent, utilities, property tax, home insurance, and mortgage interest. Though you cannot claim 100% of these expenses, claiming a portion will still save you a lot come tax time.
Purchasing Capital Assets at Year End
Businesses require capital assets such as furniture and equipment, computer hardware and software, leasehold improvements etc. If equipment needs to be purchased, or there is a need to make leasehold improvements for the business, when possible, these should be made towards the end of the year. By doing so, the business can claim a full year depreciation (subject to the half year rule) even though the assets were in use for a few weeks or months.
Get Your Salary/Dividend Mix Correct
A small business owner can be compensated by being paid a salary, receiving a dividend, or a mix of both. All three options have their own advantages and disadvantages. The key is to determine what mix will maximize each individual shareholder’s earnings. Determining the right mix can be complicated and confusing so it is always best to ask an experienced accountant to help get the salary/dividend mix balance right.
Income Splitting with Family Members
Paying spouses or children a reasonable salary or wage from a small business is deductible. The key word here is REASONABLE, meaning the salary paid should fairly compensate the family member for the amount of work or services provided to the small business. This can reduce the family tax bill when compared to paying all the salary to the small business owner.
Take Advantage of Tax Credits
Small businesses could be doing business as usual and not realize that there are tax credits available that could help the business minimize its taxes. Sometimes these credits are only available if an election is filed. For example, if a small business hires an apprentice it could apply for the Apprenticeship Job Creation Tax Credit (AJCTC). The AJTC is a non-refundable tax credit equal to 10% of the eligible salaries and wages payable to eligible apprentices employed after May 1, 2006. The maximum credit an employer can claim and apply for is $2,000 per year for each eligible apprentice.