It's tax time and you finally have to get the receipts from various parts of your house, car, and office together so that you can bring them to your accountant. You put everything you thought even remotely related to your business in a box and submit them to your accountant. Your accountant looks through them, and finds many receipts that are not related to the business but he doesn’t have the heart, or maybe the time, to tell you that this isn’t a business expense. Instead he takes the information he doesn’t need and leaves it aside.
The above scenario is more common than you might think.
Everyone’s accountant works differently but I honestly think it’s important to have that conversation with a client so that they can make an informed decision when making purchases. I don’t want a client to be thinking that a purchase they are making is business when it isn’t a deductible expense. This is why I think it’s important to understand general information related to business expenses to empower the owner to know what they can and cannot expense, or at least ensure they know when it’s worth asking their accountant.
What is a business expense?
A business expense is any amount paid (or will have to be paid in the case of a corporation) to earn business income.
The above sentence can provide guidance and clear up a majority of “is this deductible” questions. If you spend money and it directly affects your ability to generate income than that’s a pretty clear answer.
I think the most common scenario where owners start crossing the line is when expense are too extravagant or unnecessary.
For example: A business owner is drawing a modest salary out of their small business because they prefer to keep their money inside the business, for the various tax benefits of course. They then decide, because they drive a lot for work, that they will lease a car inside the company so that they can deduct this vehicle as a business expense. All reasonable so far. The problem is that the owner decides to lease a new 2016 Tesla. This vehicle is far behind the requirement as a regular business owner. Although it’s affordable, it is extravagant, and a 2016 Toyota Corolla can serve the same purpose. In this situation I could bet most accountants will charge back a portion personally to the owner.
Another interesting scenario I came across recently was a blogger who reviewed beer. They did an article on 3 new beers that came out and of course had to purchase them to be able to write the article. In this case it would be reasonable as the expense is directly linked to the “research” for the article. Although this doesn’t give the individual an all access pass to get as many as they want over the week leading up to publishing the article. In this scenario the individual reached out asked the question and I was able to provide feedback on how they should log these purchases going forward to allow a 100% deduction vs the regular 50% meal amount.
The lesson to understand is that expenses need to be reasonable in relation to your business. Although you may be able to pass on some things, it’s important not to push the issue on every part of your business to ensure the maximum reduction in taxable income with the least amount of headache from CRA. It’s also important to understand that this part of tax is where an accountant can be very valuable because everyone will have their own opinion on reasonability. Having a quick conversation with your accountant about some of the more unusual expenses can help save you money in the long-term.
To ensure this post isn’t too long I will talk about some of the deductions you don’t want to miss in your small business in my next posting.
I will continue on with expenses in my next post and provide more specifics of deductions your small business wouldn't want to miss!