Annie Noh, owner of Clear Living Clinic in Toronto, knew she would need a professional number-cruncher at tax time.Kevin Van Paassen/The Globe and Mail
Annie Noh is a whiz at business, but she learned soon after opening her health clinic in Toronto two years ago that she needed the help of a professional number-cruncher, especially for taxes.
Her business, Clear Living Clinic, specializes in colon hydrotherapy. While she got the best training, purchased high-tech equipment and hired the right staff, Ms. Noh initially didn't put as great an emphasis on planning for tax season.
"I knew I had to have a good accountant, but just like most new business owners, I also found myself struggling with dealing with so many urgent tasks. So I put off looking for one until the last minute," says Ms. Noh, 38.
Whether entrepreneurs seek a professional or use software to prepare their taxes, adequate preparation is key. We asked three tax pros to suggest tips for small businesses on maximizing deductions, minimizing costly mistakes and reducing the risk of an audit.
Choose the right business structure
Deciding whether to be set up as a sole proprietor, partnership or corporation is crucial, as each provides different benefits and risks, says Frank Fazzari, a CPA and managing partner of Fazzari + Partners LLP Chartered Accountants, based in Vaughan, Ont.
"Getting an accountant and lawyer involved at the beginning stages can ensure you obtain the maximum tax benefits," Mr. Fazzari says. Consulting a tax accountant is also a deductible expense, he notes.
Most new small business owners are not well versed in what they need to set up from the start, says Rita Zelikman, a chartered professional accountant based in Thornhill, Ont. "Decisions like picking the right year-end, deciding how much to pay yourself or whether to do income splitting with other family members, choosing the right HST method to use – mistakes in any of these can cost you more in taxes."
Manage cash flow
Sometimes money gets tied up in receivables if the owner or manager is not on top of collections, Ms. Zelikman says. "Income is calculated on an accrual basis, so even if you haven't collected on a lot of receivables by tax time, or HST time, you still have to remit the tax/HST on those, which can leave business owners in a big cash deficit," she says.
"Some businesses offer a small discount to clients who pay quickly. This encourages good cash flow."
Healthy workers, healthy bottom line
Business owners can offer a Canada Revenue Agency-approved private health services plan (PHSP) – a tax-free vehicle for financing the health-care costs of the owner or employees. A business may deduct PHSP payments made on behalf of its employees. The medical and dental plan payments are not taxable to the employees, and there are no CPP or EI premiums charged on them.
The CRA gives the option of using a PHSP to convert medical into business expenses, "allowing you to reduce your business income," says Shayan Rashid, a CPA and partner with SRJ Chartered Accountants, with offices in Toronto and Mississauga.
Know your deductions
Most expenses incurred to earn business income can be claimed come tax time, says Mr. Fazzari. Among common acceptable expenses are a home office, vehicle, meal and entertainment spending – as long as you can demonstrate they are necessary for your business and are reasonable.
On the other hand, even if your business pays for a golf membership, you cannot obtain a tax deduction for the cost, Mr. Fazzari notes. Clothing, unless it consists of uniforms needed for the job for yourself or employees, also can't be claimed.
Watch those deadlines
"Owing taxes is not illegal, but not filing them is," Ms. Zelikman says. "The CRA has introduced very strict and hefty penalties to deter non-filers and late filers." The best way to keep the CRA off your back is to file everything on time, she says, even if you don't immediately have the funds to pay. "Once they start asking you for returns, you're on the radar."
Separate business from personal
While it may seem practical to use a single bank account and credit card for both personal and business purposes, it can be extremely difficult to separate the expenses for tax purposes, Mr. Fazzari says. "The CRA has become very aggressive recently, especially when a business's records are poor and there appears to be a combining of personal and business expenses."
Should you be audited, and be unable to explain all of the expenses you have claimed for your business, the CRA may deny legitimate expenses as well, he said.