How to Stay Ahead of the Tax Man

How to Stay Ahead of the Tax Man

Small business owners and self-employed persons are people who follow their dreams!  Whether you are an up-and-coming entrepreneur, semi-retired, or want to become your own boss, we all must play by rules.

As you start down the road, here are common mistakes people make.  Here are some important tips  you could use to run your business and comply with the Canada Revenue Agency (CRA) or the Internal Revenue Service (IRS) rules:

Keeping the Small in Small Business

While small businesses are usually thought of as privately held, the government looks at them in a more detailed fashion. Depending on the jurisdiction, there are limits to who is normally eligible for the lowest tax rates on a prescribed level of taxable income.

If an expense is needed to conduct business, you can deduct it

The tax agency may not always agree with expenses business owners think are “business-related.” For the most part, if you need to purchase a service or product to earn income, its costs can be deducted from the business’s revenue. You should be aware that some capital outlays you feel are needed may not be deductible right away, especially expenses for longer-lasting assets you will be using for several years.

Employee or self-employed?

Small business owners and self-employed persons are the same when it comes to allowable business expense deductions. The important difference between an employee and a self-employed person is that a self-employed person determines how, where and when they work.  They are their own boss. 

Apart from a few exceptions, nothing is deductible against employment income for tax purposes.  Self-employed people and business owners generally find the reverse. Except for some specific tax rules, most expenses are deductible.

Start Right, End Right

Proper planning may reduce the amount of tax you have to pay each year. Involve a CPA, a Chartered Professional Accountant in Canada or a Certified Public Accountant in the US from the very beginning. By doing so, you may benefit from opportunities that you might not be familiar with. Business structure, tax deferrals, income splitting, and tax credits, to name but a few, all present opportunities to save money and reduce personal financial risk.  An Accountant can assist with other necessary steps such as registering your business, creating the CRA or IRS account for sales taxes and payroll and establishing proper record-keeping processes, confidentiality, and cyber risks.

Make the most of the calendar

Incorporated businesses can choose a fiscal year-end date convenient to their needs. Golf courses like October as that time of year is traditionally the end of one season and the start of the next. Other seasonal businesses may find that spring or summer is the best time as it is their slow time when they can focus on catching up on administrative tasks.  By selecting the right date, you can arrange to have the money when CRA or IRS payments are due.

An incorporated business owner also has the flexibility to determine the best mix of salary and dividend payment to minimize their tax and how to best time payment to minimize tax obligations.

Hire the skills and technology you need

Expert advice and the most current technology can save what you pay for it, often many times over. If paperwork is not your thing, hire an accountant/bookkeeper. This person could save you hours and money by keeping your accounts updated and out of trouble. Finally, find a CPA relatively close in proximity to your location. It will make it easier to meet whenever the need arises.