Every day, we meet with new small business owners. They always have the same questions about their businesses. This paper is to provide some simple answers to the most common questions.
1. What can I claim as a business expense?
Operating a business is similar to going on a safari to Africa. If I asked you “How much did the safari cost?” you would simply add up the receipts for the trip and tell me the cost. As a new small business owner, you are in an adventure of business. Any expense that you pay in order to be on your adventure can be claimed as a business expense.
The most common and straight forward expenses are those of advertising, office supplies, professional fees, insurance, freight, postage, meals and bank fees. These are straight forward because they are typical business expenses and don’t require a lot of interpretation or calculation. You simply add up the receipts and you have the total expense.
Other expenses such as office rent, automobile, and wages are all acceptable expenses but are usually a bit more complicated to determine. These areas have various rules that apply that all business owners should know early in their adventure.
2. What do I need to retain to prove my business expenses?
So going back to the example of the safari adventure in Africa, if you were asked to show that you actually were on the trip, you would probably pull out things like plane tickets, hotel bills and meal receipts. Anyone could see from the addresses on the bills, the dates and the descriptions that you were in Africa, you spent money and a general time frame for the trip. This would provide good evidence of your trip to Africa. The same principles hold true for your adventure in business.
One thing that is hard to remember, even for seasoned business people, is to get the proper receipt for each and every business transaction. Many business people know the feeling of walking out of a restaurant or driving away from a gas pump and realizing that they didn’t get the receipt that they need. In that moment, the business owner has converted a business expense to a personal expense.
The general rule of thumb in this area is that you need to get a receipt that shows the actual description of the items that were purchased. The receipt produced out of a debit or credit card processing machine that only shows the total amount in not going to cut it with a CRA auditor. Neither will the Visa or MasterCard statements showing a company name and an amount. In short, you need to get a receipt that shows the paper, pencils, gas or hamburger that was purchased to allow you to do your business.
3. How does office rent work in a new business?
While you are traveling around Africa, you are going to need to have a place back home to store your belongings while you are traveling. Some people might put this all in a storage unit and pay rent. Others will put their belongs into a friend’s house and pay rent. Others might simply lock the front door of their house and continue to pay the rent or mortgage payments. This location, though, will be where you return when the trip is finished.
New business owners need this same type of space when they start their businesses. Most people will use some space in their homes. This space will usually be a den, converted bedroom or part of the basement. The Canadian tax system has a system to recognize the costs associated with this space.
The very general rule is that you will be able to recognize a portion of your home expenses as office rent in your business. The first step is to calculate the total costs associated with your home. This should include the mortgage interest, rent, the condo fees, the home insurance, the utilities, property tax and maintenance costs. Once you have these numbers, you calculate the total amount of space used in the house for the business. This amount in then divided by the total space available in the house. The ending result is the percentage of home expenses that can be claimed as office rent. For most of the businesses we deal with, the percentage amount is usually 10 to 15%.
4. How do automobile expenses work in a new business?
Pretend that you decide to take your compact car to Africa on your safari. If you were asked “How much did you spend on auto expenses on your trip?” you would probably come up with a total for the gas, the repairs and the maintenance while the vehicle was physically in Africa. You wouldn’t add in the expenses of gas and repairs in Canada as these would not be costs associated with the Africa trip. Business auto expenses work in a similar manner to this.