Running a small business can be incredibly rewarding, but it’s certainly not easy work. One major change from being employed by a business to running your own is how you have to report your taxes. Small business owners are more likely to be audited by the CRA than folks who are employed by a business and there are several common mistakes that can trigger an audit. Here, we’re going to go over a number of mistakes small businesses often make when filing their taxes – some of them might increase your chances of being audited, while others will lead to paying more income tax than you should:
Mistake #1: Failing to get Organized
Long-time readers of the blog will know that I harp on this point again and again. There’s a good reason for that; proper tax accounting starts with how well-organized you are. When you can’t find receipts for particular expenses, you might be prone to doing one of two things: under reporting expenses, which leads to higher taxes, or improvising, which leads to audits. You need exact figures; the CRA will be looking very carefully at your return, and if it seems like you’ve just rounded everything off, they will come asking for proof. Get bookkeeping software, organize your receipts into folders, and don’t take this lightly.
Mistake #2: Over Claiming on Expenses
This is pretty intimately tied to mistake #1. When you don’t record your expenses properly, you’re caught in a position where you’re likely to guess at how much you spent, and when you do that, you may overshoot the actual amounts. Take, for example, fuel charges – without receipts, you might guess that you spent more than you really did on gas to get around for your business. The CRA keeps stats on gas use for business vehicles, and you’d better believe they’re going to double-check your reports against those stats. Don’t guess.
Mistake #3: Forgetting to Claim Eligible Expenses for Home Businesses
You work from home and you have an office and you may not realize that some of your home expenses can be written off. You can write off a portion of your mortgage interest or rent if there’s an area in your home dedicated to business use. The same goes for other costs, like your hydro and water bills. You may also be able to write off business insurance and depreciables assets you purchase for your home business may also be eligible for capital cost allowance deductions.
Mistake #4: Not Writing Off Trade Payments
I’m a big fan of bartering – you and the person you’re bartering with will often end up with more value because you’re trading expertise for expertise. Another bonus: it can be pretty fun! One problem with bartering, however, is that it can be hard to ascertain the actual market value of the goods or services you received. That’s something you need to do – just like cash payments, the CRA requires you to report anything of value you received from a trade payment.
Mistake #5: Claiming Ineligible Expenses
This is a tricky one. When you operate a small business, you probably have a number of skills, but accounting may not be one of them – you might misinterpret the tax code and claim an expense that isn’t eligible. Should the CRA discover such a mistake, they won’t only require you to pay more in taxes – they’ll consider it unreported income, and you’ll have to pay interest on the amounts that you owe. That’s one of the reasons you should look for professional CPA services provided in Winnipeg – we can guide you through the tax code, so you know what can be claimed and what can’t be.