Record Keeping and Organization
Ensuring that you maintain all your documents in an organized fashion is in some ways the most important task that a self-employed/small business owner should do. It is important to have a system , either using physical file folders or a paperless office type “accounting” folder on your computer, where you maintain all your invoices, bills, receipts, bank statements and government/tax documents. Filing the documents so that they are easy to locate makes life much easier at tax time. Even if you are not one to organize your documents regularly, at the least take the shoebox approach by keeping them contained in an area that is clearly designated for business documents. Organizing can then be done when necessary (which is ideally more than a week before your taxes are due).
Banking
Having a separate bank account and credit card for your business can be invaluable when trying to figure out your financial picture, particularly if you only do it once a year. It is also a great way to see your available funds and a quick way to calculate revenues and expenses in the absence of an accounting system. Ideally this is a business bank account which can be set up once you register your business (which is very easy to do in most provinces) and receive a business number. If you don’t have a business bank account, a separate personal bank account is ok.
Invoicing
For service based businesses, setting up a process to invoice your clients at a regular, periodic basis will improve your cash flow, reduce bad debts and help to reduce questions from your clients when they receive their invoice months after the service has been performed. There are numerous invoicing software available in the cloud, many of which are free. Alternatively, an invoice template can be set up in Word or Google Docs. If registered, you are required to reflect the GST and QST numbers on the invoice.
business expenses
CRA provides a list of deductible expenses with some detail on each one. Essentially, most expenses that are incurred to generate business income are considered to be deductible unless they are specifically disallowed. For example clothing expenses are generally disallowed. Professional fees incurred to buy a capital property (like a building) cannot be deducted as an expense and are instead added to the capital cost of the property. Expenses paid for in advance like a security deposit for rent are not deductible until actually used. There are also a number of specific rules with respect to meals and entertainment expenses.
Home Office Expenses
If you have the luxury of working from home, and this is your only office, you are allowed to deduct expenses that relate to your office plus a percentage of expenses that relate to your total home like mortgage interest or rent, insurance, property taxes, alarm, condo fees and utilities. It is important to keep all the bills and a record of the calculation if asked later. Repairs and maintenance can be deducted if they relate to your home as a whole (at the designated percentage) or the office specifically (100%), however costs relating to specific areas of your home are not tax deductible eg. if you renovated your kitchen, this is not deductible. Here is a list of Ideas to help you organize your home office
Cell Phones and Internet
Most of us use our cell phones and the internet for business as well as personally. These expenses are deductible to the extent that you can reasonably prove that they relate to your business. It is advisable to calculate personal vs business use and use this percentage when calculating the business expense to be deducted.
Automobile Expenses
If you use your vehicle to meet with clients or make sales calls, it is deductible. One caveat is that driving from home to your office is not deductible (this is not applicable if your office is at your home). If you lease your vehicle you are allowed to deduct up to $800 of monthly lease costs which then has to be prorated based on business vs personal use. You are also allowed to deduct the same percentage of license, registration, fuel and maintenance costs. It is important to keep an automobile log that includes all business related travel.
travel expenses
Expenses such as airline and train tickets, hotel rooms, and other travel related costs that relate to business are deductible. This is one of the most audited areas by CRA and RQ and as such it is very important to document the business reason for travel eg. meeting with clients or suppliers and to deduct any portion of the costs that are personal in nature. For example costs of tickets for your spouse or children should be deducted from the total travel costs. When adding a few vacation days to a business trip, the total travel costs should be prorated on reasonable basis.
Bad Debts
For deadbeat clients and customers that do not pay and you assess that there is significant likelihood that you will not receive payment, any amounts owing can be written off as bad debts which are an expense on your income statement. Any future collections can then be included at the time of recovery.
