Here’s some advice on what can be claimed as a business expense and how to keep auditors at bay come tax time.
It’s tax time and if you’re the proud owner of a fledgling small business, that can be intimidating. One of the common questions small- business owners have when taxes are due is what can be claimed as legitimate business expenses.
Entertainment, assets and automobiles are the big three. Entertainment is a form of promotion or advertising that is represented by meals, drinking and social events (think hockey games or concerts) as well as gifts of these items. You can claim these as business expenses but beware – it’s an area that will definitely be reviewed if you are ever audited. Blaine Anderson, a chartered accountant and partner in the Whitehorse office of MacKay Partners LLP, says good documentation is required. Simply providing receipts from restaurants and saying they were for business purposes won’t cut it with the auditor.
For example, say you’ve taken a potential client out for dinner. The name of the client and a description of the event should be included with the receipt. “Revenue Canada is pretty reasonable but they’ve been known to contact those people and verify certain events,” Anderson says.
Small-business owners are also likely to use their own personal vehicle for business purposes. If you do, insurance and gas costs and any repairs to that vehicle can be partially claimed as business expenses. But once again, dogged documentation is necessary. You can’t just say your vehicle was used 70 or 80 per cent of the time for business. You need to log your kilometres. Anderson suggests keeping a log – MacKay’s offices can provide you with a free one – and mark down how many kilometres were travelled each trip and how many of those kilometres were business-related. This is important because you have to be able to re-trace your business trip and identify its business relevance. “Not a lot of people use logs,” Anderson says. “That will get you into some trouble.”
Your assets are another legitimate business expense, materials like office equipment and supplies. Interestingly, if you were previously an employee, but used your money to buy items for your work that are now being used for your new business, you can claim those as expenses as well. But be sure to make a list with the fair market of what these items might be worth today, not what they were worth when you bought them.
As with anything in life and in business, knowledge is power. Do some research on what you can claim as a business expense and what you can’t. It also helps to get into the habit of seeing if any questionable expense might be able to be claimed.
Kelly Robertson, who co-owns Breakaway Fitness in Yellowknife with Atef Hamie, says that’s what she has learned – ask the experts. “Have a good accountant who can give you good advice,” she says. And don’t assume that something can’t be written off. “For most people I advise them to be proactive,” Anderson says. “If you’re not sure, always phone or ask.”
