Running your own business is transformational—and so is being your own boss. The option to work remotely, or even according to your own hours is definitely an attractive option to many. However, owning a business comes with some headaches as well. With tax season upon us, filing your taxes could seem like a chore, but it doesn’t have to be!
Defining a Small Business Owner
When you first think of the term “small business” what exactly crosses your mind? Is it that bakery shop that just opened up down the street? Maybe it’s your friend who just opened up a stationery shop. You don’t need to have employees working for you or to open up shop to be a small business owner. If you’re self-employed in any capacity (yes, even without registering your business), guess what: you’re considered a small business owner!
1. Choosing Your Business Structure is Key
These days, most small businesses start out as sole proprietors, meaning you and your business are the same entity. All aspects of your business are included in your personal tax return (your T1 income tax and benefit return), where your income and expenses are filled out in the self-employed section. When you’re finished, you have to complete an additional T2125 Statement of Business Activities and voila - you’re done! This form is sent to the Canada Revenue Agency (CRA) along with the rest of your typical forms. Quebec residents record the same information on Form TP-80-V.
If you’re working in a business partnership, don’t fret! Filing your taxes is similar to operating a business on your own. Make sure to report your taxes on your personal tax return by filling out the T2125.
Why Is This Important?
The type of business structure you operate is key in determining how you prepare your tax return. Leaving your business unincorporated versus forming a company has its own pros and cons, such as having your profits taxed at a personal rate as opposed to a corporate rate. If you’re planning to start a new business and need some help, check out this CRA checklist.
2. Keep your Records Accurate and Consistent
Small business owners, particularly newcomers, may be astounded by the financial responsibility that comes with record keeping. This is why consistency is key. Try to set time aside regularly to organize your receipts and track your income. A little bit goes a long way. You can enter your expenses and income into Kashoo on-the-go through the Kashoo app. The CRA accepts digital copies of your receipts for audits so snapping a picture of your receipts and attaching them to your expense entries can help ensure you never miss out on any more deductions.
For records outside of your expenses, you could start a log book to track important deduction aspects like your business’ mileage. Even if you've only tracked a couple of months worth of data, it will still be very helpful in the case you get audited. You should also sign up for e-billing for utilities if you’re claiming home office expenses.
Why Is This Important?
Keeping your books accurate and up-to-date will make your tax season that much less stressful! And if you do end up being audited, having your books ready and organized will save you a lot of trouble with the CRA.
3. Preparing your Tax Return Accurately
Because your T1 only allows you to enter your gross and net income, your T2125 is where the real work for filing your taxes come in.
The self-employed section of your form T2125 comprises of three sections. Here’s a run down of how the process will go.
This section includes the general details of your business such as:
- Business name and address. This is either your own name, or your business’ “official” name. The same goes for your business address - use your home address if your office is home-based.
- Industry code for your business. Stats Canada keeps track of how many businesses are in a particular field by checking the industry code. Need help finding your code? Check out the full list on the CRA’s Industry codes web page.
- Information on partners or co-owners. If you’re a sole proprietor, you can leave this blank.
- Fiscal period for your business. Most small business owners use the calendar year as their fiscal year.
This section is exactly what you think it is. The profit you make from performing your service (i.e. freelancing graphic design, contract writing), to selling your product (i.e. online fitness training guide)—these are all considered as your income. Other information such as subcontractor’s payments, GST/HST amounts, or even discounts are all factored into this section, depending on your business structure. The next section is where you’ll include all the costs of running your small business.
Starting your own business isn’t all profit. Some common expenses that small business owners have include:
Sound familiar? An important tip to filing your business expenses is to make sure you’re claiming some of that money back. Do you operate your business from home? Do you drive your own car for deliveries? You might qualify to claim home office expenses or a portion of your fuel, insurance, or even repairs back!
There are two main reasons why you should claim your business-related expenses.
Not only are you subtracting your costs from your income—similar to setting money aside in your Registered Retirement Savings Plan (RRSP) where less tax is due—recording all your expenses allow you to view the most accurate picture of your business’ health. Removing the costs of running your business alone lets you lay out all your cards and figure out exactly how much money you’re really making.
Why Is This Important?
Filing your taxes accurately not only saves you trouble with the CRA—it can also save you time and money! Make sure you don't miss any key information and ensure that you've calculated all of your expenses. One of the biggest tax mistakes that small businesses make is missing out on deductions that they could've claimed.
Small Business Tax Myths
The money I make is tax-free if I’m a student.
False. The CRA does not put you in a tax-free category if you’re in school. If you’re self-employed, the details must be included in your tax return.
I’m allowed to deduct a section of my home as a business, as long as I use it most of the time for business purposes.
False. If where you work at home is a kitchen table where you just so happen to also host dinners on, then you can forget about claiming the business expense. Deducting a home office or business work area needs to meet these criteria: It must be BOTH (a) regularly, and (b) exclusively for business purposes. For certain rental or storage use, you are required to use the property regularly but not exclusively.
My business didn’t make any money so I don’t have to report it on my tax return.
False. Again, you are still required to include all details of your small business - whether or not you make profit. Most businesses don’t see profit until after their first year or more.
As a small business owner, the workload can be tough and tax season can easily catch you off guard. Filing your taxes shouldn’t have to be a chore, especially when you’re busy building your business. Simplify the process and save yourself time by having your books and reports ready to go! Sign up for our new bookkeeping service today and we’ll catch up your books for 2017 for 50% off.