Lower Your Home Business Income Tax
If you own a home business, tax time can be trying not just financially but emotionally too. You spend time putting your financial records together to take to your accountant, and at the end may have a bigger tax bill than you had expected. to add to the frustration, you have to pay your accountant to find out how much you have to pay the government.
There are steps that you can take right now to start making your life less taxing - in many ways - next year.
Incorporation may be one of the most effective steps you can take. Aside from an incorporated company's ability to protect the personal assets of you and your family against a creditor's claims, there are significant tax benefits.
While your life initially becomes more complicated because you need to take steps such as setting up the incorporated company, doing more financial reporting and preparing a separate tax return for the company, the tax breaks are rewarding.
When you withdraw money from the corporation as salary or dividends, it will be taxed at your personal tax rate. However, if you do not need all of the corporation's earnings to support your lifestyle, you may be better off leaving the earnings in the company, where the money can be re-invested using higher after-tax dollars.
Another way incorporation can lessen or defer your tax burden is if you bring other family members into the company as shareholders. This allows the company to pass some of its after-tax earnings in the form of dividends to someone who is at a lower tax bracket, so that the overall tax burden on the family is lower.
Many business people have put a family member on the payroll as a form of income splitting. However, unless the family member has skills that you specifically need and for which you will pay a market-rate salary, you may be best to avoid this route. Tax authorities have taken a dim view of attempts to reduce taxes through paying a family member an unreasonable salary. And, you should never pay a family member for anything other than actual work performed. It may be better to pay the family member in the form of dividends, which can be paid whether the family member is active or non-active in the business.
Other ways to set your financial house in order before tax time rolls around again would include focusing on paying down personal debt that is not tax deductible, rather than deductible, business, debt. Essentially, this means paying down personal debt such as a mortgage, before you pay down debt you have incurred to generate income from a business or property.
Every business should set up at least a basic bookkeeping system. Without it you may end up paying more taxes than you need to because of insufficient documentation around business deductions. Either you miss out on possible deductions - or end up having the tax authorities challenge the deductions you do claim.
To deal with this problem, as you receive receipts for expenses, take note of what they're about, and record those details right away before you forget. If it's a business lunch, for example, record who you met with, and what the conversation was about. This way, you aren't trying to pull together a year's worth of receipts at the end of the year.
The same goes for eligible expenses for a home office. Keep track of your expenses, so you can demonstrate that the amount you're deducting is justifiable. This includes property taxes, utilities, telephone charges for a separate phone line and insurance. You can deduct your mortgage interest even in Canada, but not the principle of blended mortgage payments.
Keeping track of your financial transactions as they occur has many benefits. You are able to maintain accurate records because there is no concern that you will forget details over time, and you have less work to do to get your finances in shape for tax return preparation. As well, you have the peace of mind that comes from knowing that you will not be confronted by a time-consuming, challenging task at the end of each year when it comes time to pull your financial records together.
Perhaps the greatest value that you will gain from having your bookkeeping up to date is that you will be able to examine the financial health of your business regularly. You will then be able to take corrective action or take advantage of opportunities that you identify.
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