Lowering the tax bill is a common goal for every profitable business. Maximizing business deductions can help you achieve this. At times, you may wonder what expenses are deductible. This is a 2-step process. You first need to ensure the business expense meets the four criteria used by the CRA. Next, you should become familiar with the expenses that are tax-deductible by most businesses. We will also go through a list of common business expenses you can deduct.
Business start-up costs are fully deductible, including those that preceded the operation of the business. Note that an expense can be deducted only if you operated the business in the fiscal period in which the expense was incurred.
Business tax, licences, and dues
Business tax, licences and dues are mandatory costs of running a business and are fully deductible. The exception is club membership dues if the main purpose is used for dining, recreation, or sporting activities.
You can deduct all ordinary commercial insurance premiums incurred on the business itself, buildings, machinery, and equipment that are used in your business. Insurance costs related to motor vehicle must be claimed as motor vehicle expenses.
Commercial rent is deductible as long as the location is used as your principal place of business.
Salaries and wages
Gross salaries and other benefits, including the employer’s portion of CPP, EI and workers’ compensation premiums are fully deductible. However, dividends paid to shareholders of the company are after-tax payments and are not deductible.
Small items used in business such as pencils, pens, stamps, paperclips and stationery are deductible. However, items like furniture, computers, and equipment are not deductible because they are capital expenditures. These assets must be depreciated beyond the current fiscal year.
You can deduct the cost of items that the business used indirectly to provide goods or services. For instance, drugs and medication used in a veterinary operation, or cleaning supplies used by a plumber.
Home office expenses
Your business must meet the 2 criteria to claim home office expenses:
- It is your principal place of business
- You use the space only to earn your business income, and you use it on a regular and ongoing basis to meet your customers
If your business meets both criteria, you can deduct home expenses pertaining to the proportion of the home office space. For example, if your home is 1,000 square feet and your office is 150 square feet, your office is 15% of your home’s total size. This means you are able to deduct 15% of many home expenses such as heat, electricity, insurance, maintenance, mortgage interest (or rent), and property taxes.
Meals and entertainment
Business meals and entertainment expenses for taking a client out are deductible at a rate of 50%.
Travel costs such as business trips are deductible if the purpose is to earn business income. However in most cases, the 50% limit applies to the cost of meals, beverages, and entertainment when you travel.
Interest and bank charges
Interest incurred on money borrowed to operate the business is deductible. Also, bank charges incurred to operate the business and payment processing fees are fully deductible.
Telecommunications and utilities
Phone and internet bills used in business are deductible. If the expense includes a personal component, you will need to prorate the expense based on business usage.
You can also deduct expenses for utilities such as gas, oil, electricity, water and cable, if you incurred these expenses to earn income.
You can deduct marketing expenses, including advertising on radio and television stations. Digital advertising on social media, email marketing, and SEO are also tax deductible.
The list above includes common business expenses you can deduct but is not exhaustive. What your business can actually deduct may vary depending on the industry and the nature of the business.