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The little shoebox of horrors

SASHA NAGY

Globe and Mail Update

March 21, 2006 at 4:02 PM EDT

It is any accountant's tax-time nightmare.

A client arrives with a box bursting with receipts. Call it the little shoebox of horrors. The client demands that the accountant make sense of the business expenses all the while keeping the tax payable and the accountant's fee to a minimum.

Karen Yull has seen the shoebox. Ms. Yull, a tax specialist at Grant Thornton LLP and author of the book Smart Tax Tips, says a little organization can go a long way.

"I hate the shoebox. And no, it's not a stereotype. I've seen it. I've seen grocery store bags full receipt . . .liquor store bags of receipts," she says, pausing for effect. "They are the nightmares.

"[Those small business owners] are the ones that are usually paying for things with cash. They take money out of the bank and then they buy stuff with that. Or that have all their personal and business expenses coming out of the same account. They'll say, 'Well, you're the accountant . . .' "

Small business owners can save themselves a lot of time and money by keeping track of their expenses and keeping their business affairs separate from their personal banking, Ms. Yull says.

It sounds simple, but Ms. Yull has seen it time and time again where a small business owner mixes personal and professional expenses only to leave the complicated task of separating the tangled web of receipts to the accountant at tax time.

"It's always nice to have one bank account for the business, that you only use for business expenses. I've seen some people just put it through their personal bank account," she said. "That can be a real nightmare. As soon as you know you are going to go into business, please keep a separate bank account and run everything through the bank account."

"If you are using a VISA or a credit card for expenses, just use it for your business expenses," she adds.

"It is hard for a lot of people to understand that concept. Sometimes they end up mixing their business and personal expenses, which really gets confusing. Because they look at the business as being a part of themselves."

According to Ms. Yull, there are no significant tax changes facing small business owners this year. And many of the tips she suggests won't do any one any good at this late stage. The tax filing deadline is April 30th, and the deadline for taxpayers with business income is June 15th.

Ms. Yull says that the single biggest decision facing any small business owner is whether to incorporate your business.

She says that it is a good idea to consider incorporating your business if you are earning more than you are required to live on every month.

"Someone with a small business who his earning enough to pay their mortgage and buy their food, but they don't have anything left over, then its likely not advantageous [to incorporate].

"But if you have a lot of money left over at the end of the year, then it might be a good idea to become incorporated," she said.

Corporations offer limited liability to the owner, but there increased requirements for compliance.

Incorporated companies filed at a year-end date of their determination, and must follow more stringent accounting guidelines. Some owners, who have incorporated their business, often don't realize this.

"[Owners of incorporated companies] have trouble understanding this sometimes, they think, 'this is my money, why can't I just take money out whenever I want.' You can, but it has to be accounted for properly. It's either a salary in which case there should be withholdings, or a dividend, and you've got to have proper resolutions, or it's a loan from the company, it has to be documented. It's a separate entity that you are dealing with."

Ms Yull offers some key area that a small business owner can focus on to help at tax time next year.

  • Retirement planning: Generally someone who has their own business, they don't usually have their own pension plan. They've got to plan for their retirement years, and RRSPs are the best way to do that.
  • Income splitting: If you are a sole proprietor and your wife or husband does work for the business, and you've got children who are doing some work in the business, you could consider playing them a salary which will help the tax situation. "The important thing is, they should be providing services to your business to justify paying them a salary," says Ms. Yull.
  • Small business credit cards: Use a credit card for all your business expenses and do not use it for any personal purchases.
  • Maintain your own ledger: Even a rudimentary accounting of your monthly revenues and expenses will make the accountant's job easier, says Ms. Yull. And that will save money in accounting fees charged for tax preparation.

    "Some small business owners do a good job of keeping their own records, and the account can show them how to set up a ledger recording their revenue every months, and their expenses every month," she says.

    "I like them to have a separate bank account; and if they are willing to keep their own records, have a ledger where every month they reconcile the bank account, record all the revenue in one column, record all their expenses in itemized columns such as vehicle expenses, meals, capital expenses in separate columns where they are listed every month.

    "People have varying degrees of knowledge, but the more they can do themselves, the less it is going to cost."

    And the final piece of advice is probably the best. If you are unsure about what you are doing, consult a professional.

    "It can be complicated, I generally say that if you have a small business you should be contacting someone with tax or accounting background to help you prepare your return," said Ms. Yull.

    Ms. Yull's Smart Tax Tips is an annual tax planning guide. You can register to receive her Smart Tax Tips on-line by visiting www.GrantThornton.ca/tax where a host of tax tips are also available.

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