Income Taxes – Suggestions for the sole proprietor
Soon 2020 income taxes will be due
Following are some Income Tax Suggestions for the sole proprietor. Many small businesses are sole proprietors and as such their business information is included as part of their personal income taxes due the end of April. No one likes to do taxes (well most people don’t), it’s hard enough to get them to keep their books up to date! So getting them to think about income taxes causes eyes to roll. Being Disorganized when it comes to their business books is one of the biggest problems for small businesses. CRA may impose severe penalties, including not only the inaccurate amounts identified, but interest, court fines and possible jail time. It is important to make CRA your friend, you do not want them as an enemy. Remember, if you have to pay taxes, it means your business is doing well! So not a bad thing at all.
Income Taxes & Covid-19 relief during 2020
If you received funding in any way shape or form during 2020, it is required to be reported as income.
Organization throughout the year makes doing Income Tax so much easier
Not keeping track of the income and expenses in an orderly fashion just creates more of a headache when it comes to tax time. There are many easy ways to track your income and expense information, there are numerous applications like quickbooks to assist you in this way. But in order to be able to enter the information into the application you choose you must first be organized with the gathering of this information.
Separate Account for Business
One of the errors small business owners make, especially when starting out, is using their personal account as their business account. It is important that you open a separate account for your business transactions (does not need to be a business account). I highly recommend, if you are a small business sole proprietor, who is an HST registrant, that you open an account specifically for your HST deposits and move the HST money collected into this account regularly. Do not get caught owing the HST you collected because you used it. CRA is not willing to wait. If you collect the HST it is not yours, you are collecting on behalf of the CRA, so put this money aside regularly.
Separate Credit Card for Business Expenses
I recommend you have a separate credit card to use for business purchases. Putting all your personal and business purchases on the same card will require a detailed breakout of what is business and what is personal. It is important that when the bill comes in (if you use e-bill, print off a copy), attach the appropriate receipts to the credit card statement. This not only provides the paperwork CRA will want if you are audited, but show you that the correct amount was charged or identify incorrect charges to your card. A transaction on your credit card showing you paid $59.99 to RONA does not indicate you bought a small tool, and what it was. CRA will want to know it was a small tool, what is was, and that it was business related.
The importance of keeping the paper receipts
If you are taking an expense it is imperative you have the paper backup.
Keeping track of your mileage and vehicle expenses
Most sole proprietor businesses don’t have a separate vehicle, so it is important that you keep track of your mileage. Note, if your place of business is not your home, you can only charge for mileage from your place of business. Driving to work does not count as mileage. Keep a journal of your mileage or at least where you travel to, and then use google maps for the mileage calculation. You need to have the odometer reading at the beginning of the year and again at the end of the year to determine miles driven. You can then take all of the vehicle expense you incurred and determine what % was used for business. CRA will want to see how you determined business usage percentage, hence the need to keep track.
Keep track of your household expenses if you work from home for your business
I suggest you speak with a bookkeeper or an accountant, even if you pay them for a few hours of their time. They will help you identify the things you may need to keep track of and how to utilize home and auto expenses properly. If you add assets to your home and add them (via depreciation) to your expenses this could impact you when you sell your home when it comes to capital gains. It may not be worth your while to have asset additions as an expense. Ask the experts and understanding the implications.
Only you know what you have spent, not your accountant or bookkeeper
One of the most important things I tell clients is their need to know and understand their income and expenses. Having a bookkeeper is great if you can afford one, but their output is only as good as your input, if you haven’t collected the correct (or all) receipts or tracked your income properly they have no way of knowing.
Proper bookkeeping is time consuming, and it needs specific business time allocated to it (this is not a bottom of the list task, but a top of list task). I have found with businesses “the books” are the last thing they want to deal with, they want to put all of their focus on running their business. Unfortunately without keeping proper books you are shortchanging your business, and putting yourself and your business in jeopardy. Handing this task off to a bookkeeper has “GREAT POTENTIAL TO HAVE YOU MISS THINGS YOU COULD WRITE OFF”. Hiring a bookkeeper a few years in, when you are familiar with all they need to have to do the job to the best of their ability, is great if you can afford it.
It is important you keep track of the income and expenses yourself so you know what you have spent. There may be numerous things you have not considered and items you have not included as expenses. It is only through keeping ALL receipts and doing this work for yourself for a few years, will you have a full and complete knowledge of your business.
The difference between a bookkeeper and an accountant
A bookkeeper is someone who plays an administrative role and handles the day to day tasks of recording your financial transactions (your income and your expenses through invoices, receipts etc.). In the first few years of business I try to stress to new clients the importance of doing this role yourself (and for as long as you can). Your bookkeeper will assist you with setting up appropriate categories for your business. Having income broken down into specific categories can help you identify areas of your business that are doing better than others. Knowing how each segment of your business is doing can help you make decisions going forward. Tossing all your receipts in a shoe box and handing it over at the end of the year to a bookkeeper is not the way to proceed.
An accountant typically does your income taxes and provides you with guidance and insights on how to be most tax effective.
Easy ways to keep track of those receipts for Income Tax purposes
Budget in a Baggie Program
One of the classes I teach under my Sumthing business, is a course known as “budget in a baggie”, where you MUST get a receipt for everything you purchase because you never know, as a sole proprietor, what could be a legitimate business expense. Example, you may choose to grab a quick lunch at Tim Hortons with a client and most people never ask for a receipt, so learn to ask for a receipt. So I recommend you keep 2 baggies, one for general receipts and one for business receipts. Write on the receipt that it was business and, if not clear, what the receipt is for. If a meal with a client, write the name of the client(s) on the back.
You should, at minimum, try and do your books weekly so go through the receipts and enter the details into whatever system you are using (even if it is a paper journal). Once you have entered the information put a checkmark, or some indicator that the invoice/receipt etc. has been entered. Then place these in a baggie that holds all “entered” details. GO THROUGH ALL OF YOUR PERSONAL RECEIPTS as well, as you may, say on a grocery receipt, find some items that you purchased for your business. You may have a restaurant receipt where you had a client meeting and part of this meal can be expensed. If you have paid via credit card, once you have your statement attach these receipts to the statement.