If you recently started a business or started as a contractor you may be wondering what kind of expenses are deductible. This series will help you determine better what you can and cannot deduct.
To start there are two expenses that are going to be the most important to you, especially if you don’t have a dedicated work space for your company yet. These 2 expenses just feel too good to be true. With them you’re able to deduct costs that you would regularly incur regardless of if you had a business or not. They are office use of home, and Car expenses.
The best part about home and vehicle deductions is the ability to write off overhead, or in other words, costs that you will incur regardless of your businesses existence or performance. Things such as: Insurance, utilities, rent, mortgage insurance, car insurance, lease payments, etc. The second best part is being able to brag to your friends that you’re writing things off, it just sounds cool, or at least to me it does.
The first expense we are going to look at is automobile expenses as it is a pretty large topic and it gets written about in detail on many different tax blogs. I will focus more on what you need to know as an owner in a start-up or small business versus how each deduction works.
The first step required to deduct vehicle expenses for your business is to determine how much business use and how much personal use was incurred on your vehicle. Which leads me to the first part of car expenses.
The dreaded logbook
The expectation for all use of a vehicle within a business from CRA's standpoint is that you keep a detailed log in your first year at a minimum. In the logbook you would document: the date you drove, the distance, and the reason for the trip. In most cases this is an unreasonable amount of detail (unless you use an app or other device to track the vehicles use). The good thing is that if you don’t provide a logbook, and you get audited, CRA will actually take into account other factors such as:
- Use of vehicle
- Type of vehicle (a plumber doesn’t need a Lamborghini for work)
- Who else drives the vehicle
- How it’s insured
- Other indications of personal travel
So what’s this all mean?
You essentially have 2 options in regard to keeping track of usage:
1) Keep a detailed logbook of your travel with some backup (car service odometer readings)
2) Do no keep a log book and you will be at bay of the auditor as to how much is reasonable for business use (with some negotiation from your accountant!).
There are other options in regards to mileage and logbooks but I think the above options are where 95% of business owners will have.
Writing off your car in detail
Now that you have the business use of your vehicle as a % of total KM you need to gather the expenses together. The first thing I have to do is burst the bubble that your car payment is tax deductible. Unfortunately it’s not however lease payments are. If you own the vehicle you will be able to deduct CCA (a topic I will cover in a future post) which is depreciation over the useful life of the asset. Unless you just purchased your vehicle during your first year of operations CCA you will have to determine the fair market value of the vehicle instead to add it to the CCA class.
With the lease payments/depreciation amount determined you will also need to total the amounts for Gas, insurance, interest on loan, licensing and registration costs, and maintenance. Once you have gathered them all you will have something like this:
If you leased you would instead ignore the top and take the lease payment less HST and sub in the yearly total instead of depreciation.
Writing off your car the simple approach
If you’re incorporated this second approach could be a more simplified method to calculate the costs on your vehicle. If you are a sole proprietor unfortunately this method is not for you.
The simple calculation is total business KM * 0.54 (on the first 5000, .48 thereafter) = allowable deduction. Not only is this calculation more simple it also can potentially result in a larger deduction depending on the age of the vehicle/expenses incurred.
The only thing to be aware of is that if you use this method you will have a bit more emphasis on the logbook as the number used above can have a big swing if you get a tough auditor.
A note for consideration
This post completely ignores one possible situation which is: the vehicle is owned by the corporation. If the vehicle is owned by the corporation there is an additional calculation required which would be called the Standby charge. I don’t want to spend time looking at this because if you have a standby charge it’s most likely that you have an accountant preparing your corporate tax return. In which case providing the above expense detail will be enough for him to determine the best route of attack.
Keep in mind the more you drive your vehicle personally the less you get to deduct on your taxes!
Although the information contained is limited I think that with the above information you could potentially prepare your own T2125 AKA self-employed return. If not you at least have the tools and understanding to know what exactly you are able to deduct come tax time. Stay tuned for the next installment of my Write it off series.
If you have any questions or concerns about your tax scenario, feel free to reach out to me. As always I provide a free consultation on your tax situation.
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