Small business expenses

In Canada, individuals must file their annual tax returns by April 30. If you are self-employed, you have until June 15 of each year to file your income tax return. However, if you owe on your taxes, the Canada Revenue Agency (CRA) will start charging interest on that amount, starting on May 1. Corporations are able to choose any date to end their fiscal year. But tax returns must be filed within six months of the fiscal year’s end. Canadian small businesses can deduct from their income expenses incurred to operate the business and keep it going. These are referred to as tax deductions.

What are tax deductions?

A tax deduction is the amount of money the CRA allows you to subtract from your total taxable income. If you qualify for enough deductions, you can reduce the amount you are required to pay in taxes. So you want to claim every expense that you are legally allowed to deduct.

What can I deduct for my small business?

Many of the costs you incur to run your company may be considered a business expense and can be claimed on your CRA return as a tax deduction. These tax-deductible business expenses generally fall into one of the following categories:

• Items exclusively used in your business’ operation: For example, a dry cleaner would need a large supply of hangers for cleaned clothes. A graphic designer uses a computer and design software to create the graphics. A masseuse would have to have a massage table to do their job.
• Expenses related to operating your business location. If you rent retail space, the utility costs incurred are a business expense
• Items used in the course of doing business: For example, If you use your car for deliveries, you can deduct the round-trip mileage as a business expense.

What are the most common tax deductions for small businesses?

The following operating expenses are the most common small business-related tax deductions. The CRA will allow you to deduct these items:

Business startup costs

There are a variety of startup expenses you may face. These include everything from professional advice (lawyer, accountant) to launch your business, to machinery, equipment, computers, and supplies. To be eligible for a tax deduction, the expense must occur during the tax year when the business started. It is important to document these costs properly so that you can prove these purchases during tax season.

Advertising and marketing fees

These are physical and digital materials used to market your business, as well as the cost of developing such items. Examples include flyers, business cards, signs, trade show materials, and print and design costs. Also included is the cost of digital advertising, such as the development of a website, registering the domain name, and web hosting.

Business equipment

This is the cost of machinery and computer equipment used by your business. For example, this can include computers and printers in a design studio for client projects.

Office expenses

These are tax-deductible expenses related to the operation of the business, such as computers, phones, and computer software. Desks, chairs, calculators, and filing cabinets are not included, as they are considered capital items.

Office supplies

The cost of small items like pens, pencils, paper clips, and cleaning supplies used in the course of business can be tax deductible.

Rent

This is the cost of rent paid for business property and office space, including land and buildings where your business is located.

Home office

If you run your business out of a home office, you can deduct a portion of the expenses from your home. This portion of expenses eligible for a deduction will depend on a number of factors, including the size of your home. You can also deduct expenses for utilities, rent, mortgage loan interest, and maintenance fees in proportion to the workspace being used for your business.

Maintenance and repairs

Costs incurred for minor repairs or maintenance done on equipment or property that you use to earn business income are deductible. You cannot deduct the value of your labour.

Telephone, internet, and utilities

Electricity bills, internet service providers, cell phone costs, and other such utilities can all be deductible, as long as these expenses are related to your business activities and not personal expenses. Utilities expenses can also be deducted in line with the size of the space used for your business.

Salaries, wages, and employee benefits

The gross amount of the salaries you pay can be deductible. So are benefits, such as for the premiums you pay for your team’s Employment Insurance (EI) and the Canada Pension Plan (CPP).

Meal and entertainment expenses

Half of the amount that you spend on business meals and entertainment is deductible. For example, if you take a client to dinner or to a local show, you can deduct 50% of this cost from your business income.

Business travel expenses

Half of the cost of entertainment, beverages, and meals when you travel on business can be written off. Also, the costs of public transportation fares, flights, train trips, car rentals, and hotel accommodations are fully deductible.

Motor vehicle expenses

You can claim full expenses if you’re using a vehicle exclusively for business. If it is used for both business and pleasure, you may only claim for business use and you must keep a log book to record usage, parking fees, vehicle insurance, and fuel.

Professional fees

You can deduct accounting, bookkeeping, and freelance contractor fees when consulting with professionals for your business.

Capital cost allowance (CCA)

For large purchases and expenditures like furniture, buildings, and equipment, you can claim a percentage of the cost over a period of time through depreciation. Classes for depreciable property vary, depending on the age and type of capital property.

What are less common expenses your business can claim?

There are some less common small business tax deductions allowed by CRA that you might be able to claim against your business income. These expenses can include:

Professional dues

Dues for a professional organization can be deductible. For example, if you were to sign up for the Chartered Professional Accountants of Canada or the Canadian Federation of Independent Business, you could deduct dues paid. But if you join a club that involves sports, eating, or entertainment, you cannot deduct that.

Bank account fees

Bank fees, including monthly fees and cheques, as well as credit card fees and monthly interest charges are deductible.

Business insurance

There are a variety of types of business insurance you may want to consider. All such business insurance premiums for your business are deductible. Life insurance cannot be deducted, unless used as collateral for a business loan.

Bad debt

You can deduct an account receivable if you won’t be paid and it has been posted as income for the year. You can also deduct the cost of trying to get paid, including for legal counsel or a collection agency.

Private health premiums

Private health insurance payments made by you for your own supplemental health insurance coverage are deductible.

Other expenses:

Costs specific to certain businesses are deductible. For example, retailers can deduct the cost of buying racks for clothing.

What expenses are not tax-deductible?

There are expenses that are not tax deductible, including:

• Your labour: You cannot deduct your own labour costs.
• Fines and penalties: Traffic and parking tickets, moving violations, and late payment fees are not tax-deductible.
• Clothing: You cannot write off the costs of clothing or dry cleaning for tax purposes, unless you wear a uniform or special safety clothing.
• Life insurance premiums: Life insurance or disability premiums are not tax deductible for businesses or individuals. Neither is health insurance for yourself.
• Capital costs: Costs incurred for repair that are capital in nature or have been reimbursed by your insurance company are not tax deductible.

How to track expenses for small business

Small business owners need to keep track of their expenses for business purposes, and make the most of their tax deductions. These include:

1. Keep detailed records

Keep all receipts and log all purchases. It is important to have these in case of an audit. But if you upload your receipts to Xero via Hubdoc, you don’t need to keep the receipts anymore.

2. Track spending trends

Track your expense trends over the year, so you know the types of writeoffs and deductions for which you may be eligible.

3. Plan ahead for large purchases

Anticipate your large purchases before the end of the tax year to fully take advantage of the tax deductions available to you..

4. Get help from an accountant or bookkeeper

Get some advice from a professional to make the most of your deductions. The accountant or bookkeeper can explain how you can best keep track of your finances.

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Additional FAQs

What are the biggest expenses for small businesses?

The limited financial resources of small businesses can make them vulnerable to unforeseen expenses, so plan ahead to identify which parts of the business generate the greatest costs and learn how to control them. Typically, the greatest expenses for a small business are location and lease costs, employee salaries and benefits, inventory, sales and marketing, and miscellaneous office expenses. Most small businesses start out small, as our report on starting a small business explains.

How much can I write off as a business expense?

The CRA details the common and less common business expenses that your business can write off. The important point to remember is that, to qualify, they must be incurred in order to earn business income and be reasonable under the circumstances. Expenses incurred in a business’s fiscal year must be claimed against your income in that same fiscal year.

How do I maximize my LLC tax deductions?

All businesses in Canada can deduct expenses from their income, to make their businesses operational and sustain them while they are operational. The CRA has a comprehensive list of business expenses that you can write off. The condition is that expenses must be incurred to earn the business income in the year that it is being claimed.

What are some ways to cut down on small business expenses?

Paying close attention to your business expenses is important for profitability. There are a variety of strategies businesses can employ to control expenses and prepare for unforeseen costs over the year. These include proper annual budgeting, tracking expenses diligently, managing your variable costs efficiently, and reviewing your fixed costs to ensure the best return on your investment.

What deductions can I claim without receipts?

There are certain deductions you may claim without receipts in Canada. These include the disability tax credit, medical expenses, moving expenses, digital news subscription expenses, home office expenses for employees, and the Canada training credit. For more information, check out CRA’s website.