Top 7 Expenses to Write-Off as a Business Owner
With the right kind of professional advice, there are many ways in which small businesses and business owners in general can cut costs and save money. A business expense can be an astute way to reduce a company’s costs especially when paying taxes. With over twenty major business expenses to consider for write-offs, the task of saving money by properly documenting and utilizing these business expenses (as a way of reducing tax) is by no means an easy feat. A trusted partner or consultant can help businesses like yours, identify the right expenses based on your unique business situation and save you a lot of money by writing off optimal business expenses that are most impactful for your kind of business.
While having a trusted financial partner like AgileCPA would simplify the entire process for your company, it is a good idea for us to highlight these expenses so that easing into the discussion would be more productive at any stage.
In this article we will discuss the top 7 business expenses to write-off as a business owner in order to effectively save more money on taxes. These expenses are deemed optimal because they tend to have the greatest impact on your savings in taxes, depending on the unique nature of your business.
Below is a brief highlight of optimal business expenses that can help you save money.
Top 7 Business Expense Write-Offs
By the end of this article, you will have a clear picture of how these business expenses can help you achieve your cost management goals effectively.
Prepaid Expenses and Capital Assets
Depending on the kind of business you are engaged in, some of the highest expenses you would incur are prepaid expenses (or expenses you pay ahead of time) and expenses that cover capital assets (example: Furniture, Vehicles, Software, etc).
Prepaid expenses may vary from business to business, they can be a low impact expense such as a subscription service for market data or a major expense as costly as prepaid rent (or lease) for a downtown office building in a major city like Toronto. Regardless of what kind of prepaid cost is applicable to your business, writing them off would lead to substantial tax savings. There are some rules / restrictions to these write-offs that must be considered.
You can find out more on the specifics of handling these expenses by reaching out to a trusted partner like AgileCPA.
In addition to the prepaid expenses mentioned above, capital assets (such as a proprietary software that costs millions of dollars to acquire, or haulage vehicles for a haulage company) may also constitute a major part of your company’s spending and should also be considered as part of the strategy to save on tax through business expense write-offs (example: you can only claim expenses that have already been incurred and specific depreciation rates are applicable to different capital assets).
Business Taxes, Licenses and Membership Fees
Although some restrictions apply to these business expenses, companies that pay business taxes, maintain annual memberships and companies that have to pay annual license fees, can deduct these costs for tax purposes.
Some restrictions include the limitation of deducting income taxes paid, club initiation fees including golf, and some other unique restrictions that affect certain businesses. In situations where these costs are substantial, a reasonable amount of savings can be realized from writing them off appropriately and this makes them worth the effort of exploring for tax savings.
Home Office Expenses, Supplies and Auto Expenses
Home office expenses and auto expenses are somewhat interrelated – both of these expenses are shared between business and personal use. A home office may incur similar expenses to a business that is run out of an office in the downtown area of a city. As such, for tax purposes, a portion of these expenses such as utilities, internet charges, repair and maintenance are deductible. There are guidelines that structure these deductions set by CRA which a trusted financial partner can simplify for you.
Generally, office expenses for low-cost items like pens, pencils, paperclips, stationery and stamps can be deducted while filing your taxes but items with a more significant cost like chairs and desks would be considered as capital assets (see above). Supplies can vary, depending on the kind of business being considered. Supplies may include drugs or medicine used by medical practitioners or cleaning supplies used by a cleaning service.
Fuel costs, insurance, parking fees, toll charges, lease payments and capital cost allowances can all be deducted for tax purposes in relation to the use of your automobile (car, truck or delivery van) in conducting your day-to-day business. It is important to note that CRA requires owners to keep a journal of all the trips in the year.
Interest and Bank Charges
This may be one of the least explored options for tax reduction when considering business expenses but it could constitute one of the major items in terms of savings on tax. If you took out loans to operate your business, or if you regularly incur credit card/bank fees during the course of running your business, these expenses are deductible.
Small businesses take out loans for many reasons, from improving working capital to expanding a business to financing an equipment purchase. It is good to know that any interest incurred can be written-off for tax purposes, reducing your total profits, which will result in a lower tax rate.
The CRA has many rules on how to account for deductions with more complex loan structures like capitalizing interests, interest on loans made on insurance policies, interest deductible on property no longer used for business purposes, fees deductible over a period of 1 or more years as well as fees, penalties and bonuses paid for a loan. Before obtaining a loan, it is best to first understand the tax implications of the write-offs in order to plan and optimize the tax savings.
Fees, Salaries and Benefits
Companies that pay salaries or wages and issue benefits to employees can deduct the applicable aspects of these costs for tax purposes. However, there could be exemptions and limitations, especially with larger companies (more than 50 employees). For example, larger companies offer more benefits, such as stock options, life insurance or free lunches to their employees. The implication are as follows:
- Stock Options: If companies choose to set up an Employee Stock Option Plan (ESOP), they might value the stock options and add that to the books. However, stock option expenses are not deductible for tax purposes.
- Life insurance is generally not deductible so the pay-outs (if any) will not be taxable on the beneficiaries’ end.
- Lunches are deductible; however, companies need to include it as a taxable benefit on the employees T4.
Finally, if the business owner decides to take out dividends, that is not deductible (see salary vs dividends article for more details).
Legal, Accounting and Professional Fees
Making the right choice by employing the services of a trusted Financial Partner like AgileCPA can be very advantageous. You not only get professional insight on how to minimize your taxes, you can also write off their fees which will further reduce your taxes. For example, if the annual accounting fee is $5,000 and your corporate tax rate is 26%, the true cost of the accountant is $3,650 after taxes. The value of these services and insights into your business is an investment that will propel your business to the next level.
In summary, you can deduct fees you incurred for external professional advice or services, including consulting fees. Even though some restrictions apply, you can also deduct accounting fees you incur for bookkeeping or recordkeeping services offered to you by your financial partner as well as fees you incur for preparing and filing your business income taxes.
Meals and Entertainment Expenses
Although these expenses are very popular, CRA will only allow 50% of these expenses to be claimed. A list of some common meals and entertainment expenses are shown below:
Common Meals and Entertainment Expenses:
- Food
- Beverages
- Sporting events
- Event Tickets
- Restaurant and
- Hotel/Motel Expenses
- Staff Events or Parties
- Fundraisers
We recognize that all businesses are unique and we would like to also highlight some other business expenses that you should consider for write-offs if they are applicable to your kind of business as well.
A Short List of Other Business Expenses to be Considered:
- Advertising and Promotion Expenses
- Business Start-up Expenses
- Delivery, Freight and Express Expenses
- Business Insurance Expenses
- Travel Expenses
The concepts discussed in this article have been somewhat simplified to accommodate established and new business owners, however, if you require further clarification on any of the items discussed above or not included in this article, please reach out to AgileCPA. We would be happy to help you and your business and explore your actual needs! We look forward to hearing from and working with you to achieve your company’s goals.
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