Now is the time to start thinking about the 2011 tax year. To help reduce income taxes for the current year, we are providing a list of 8 simple strategies to implement before year end.
Take a look at the list below and see how many of these strategies can be currently applied to reduce your income tax bill and which ones you can start applying right now to reduce the amount of income tax you may have to pay as a small business owner.
1) Always collect receipts for business-related activities.
All the small expenses a normal business incurs throughout a year can be tax deductible, from parking fees when meeting a client, to letters mailed, or coffee for the office. By collecting receipts for all these transactions, as long as they are business related, and filed properly, you can maximize your deductions when filing your tax return.
2) Manage your RRSP contribution.
The Registered Retirement Savings Plan (RRSP) is one of the best Income Tax Deductions for the individual and businesses owner. It incorporates a long-term savings and tax deduction mechanism like no other. If you have a high income year, look at your contribution room for the year and make a decision as to how much you want to contribute and see how much you want to carry forward. Any unused amounts will be carried forward to the next year..
However, if you are in a low income year, then it doesn’t make sense to make a large RRSP contribution as you won’t have much benefit. In this case, let unused amounts carry forward, and then make a larger contribution in a year when you have higher income, and maximize other possible deductions in the current year. Tip: You actually have until March 1 of the following year to make contributions to your RRSP to be entitled to a deduction for the previous year.
3) Maximize your non-capital losses.
If your business has a non-capital loss (defined as when your expenses exceed your income for the business) in any year, the government allows you to carry your losses back three years, or forward seven years. Before you use your losses, take a look to see when you can maximize it and decrease your income tax bill. If you paid income tax over the past three years, it might be beneficial to carry the loss back and recover the tax paid, or carry it forward to offset a larger tax bill in the future than using it when the loss occurred.
4) Maximize your charitable income tax credits.
Charitable donations to registered Canadian charities earn you tax credits. Another thing to keep in mind is that charitable donations that total over $200 provide you with more of a tax credit because they're assessed at a higher rate. To maximize your charitable income tax credits, consider giving more to the registered charities of your choice this year.
5) Maximize your Capital Cost Allowance (CCA) income tax claim.
All businesses are required to deduct the cost of any depreciable property over a period of years, through a Capital Cost Allowance claim. This includes automobiles for business use, furniture, equipment, computers, etc. One tax strategy is to claim these amounts when it can be used to reduce your income tax; not necessarily the year that it occurs in.
Because CCA is not a mandatory tax deduction, you can use as much or as little of it as you wish, carrying any unused portions forward to help offset larger income tax bills in the future. If you have little or no taxable income, you want to hold on to these deductions for a future year.
Another strategy to maximize your CCA claim is to buy and sell assets at the right time. You want to buy new assets before the end of the fiscal year and sell old assets after the current fiscal year.
6) Split your income.
Income splitting allows you to take advantage of the different marginal tax rates. The higher your income is, the higher your tax rate. By transferring a portion of your income to a spouse or child with lower income, you can reduce the tax rate on your income. This is especially beneficial to small business owners with children of post-secondary school age. Transferring to them the basic personal income tax exemption, for example, $10 000, means they will pay very low income tax, and would have some money to help pay for schooling. This would reduce your high income by the same amount, lowering your tax rate.
7) Take full advantage of the income tax deductions available to home-based businesses.
If you operate your business out of your home, or have a home office, there are many deductions that are available to be claimed when it comes to tax time. Home-based business owners can deduct a portion of many home-related expenses, like heat, electricity, maintenance, cleaning materials, home insurance, etc. If you own your home, you are also able to deduct portions of your property tax and mortgage interest.
8) Incorporate your business?
There are many tax advantages of incorporation for small businesses, which is one reason why many sole proprietors and partnerships incorporate their businesses. One of these advantages is the Small Business Tax Deduction, where the income of qualifying Canadian-held corporations is taxed at a special "reduced" rate. For Canadian-controlled private corporations claiming the small business deduction, the corporate net tax rate is 11% as of January 1, 2011. For other types of corporations, the corporate net tax rate is 16.5% as of January 1, 2011.
However, this tax strategy is only effective if incorporation is done at the right time and that your business has grown enough for incorporation to be worth it. There are high costs associated with incorporating, and there has to be enough business earnings within the company to benefit from corporate tax deferral.
Note: Each tax payer is unique, not all of these tax strategies are beneficial for every small Business owner, but hopefully this list has gotten you thinking about tax planning. The amount of income tax you pay is not a fixed number. Sometimes a few simple strategies can dramatically lower your tax obligation. Start taxing planning today!