Every day, we meet with new small business owners. They always have the same questions about their businesses. This paper is to provide some simple answers to the most common questions.
1. What can I claim as a business expense?
Operating a business is similar to going on a safari to Africa. If I asked you "How much did the safari cost?" you would simply add up the receipts for the trip and tell me the cost. As a new small business owner, you are in an adventure of business. Any expense that you pay in order to be on your adventure can be claimed as a business expense.
The most common and straight forward expenses are those of advertising, office supplies, professional fees, insurance, freight, postage, meals and bank fees. These are straight forward because they are typical business expenses and don't require a lot of interpretation or calculation. You simply add up the receipts and you have the total expense.
Other expenses such as office rent, automobile, and wages are all acceptable expenses but are usually a bit more complicated to determine. These areas have various rules that apply that all business owners should know early in their adventure.
2. What do I need to retain to prove my business expenses?
So going back to the example of the safari adventure in Africa, if you were asked to show that you actually were on the trip, you would probably pull out things like plane tickets, hotel bills and meal receipts. Anyone could see from the addresses on the bills, the dates and the descriptions that you were in Africa, you spent money and a general time frame for the trip. This would provide good evidence of your trip to Africa. The same principles hold true for your adventure in business.
One thing that is hard to remember, even for seasoned business people, is to get the proper receipt for each and every business transaction. Many business people know the feeling of walking out of a restaurant or driving away from a gas pump and realizing that they didn't get the receipt that they need. In that moment, the business owner has converted a business expense to a personal expense.
The general rule of thumb in this area is that you need to get a receipt that shows the actual description of the items that were purchased. The receipt produced out of a debit or credit card processing machine that only shows the total amount in not going to cut it with a CRA auditor. Neither will the Visa or MasterCard statements showing a company name and an amount. In short, you need to get a receipt that shows the paper, pencils, gas or hamburger that was purchased to allow you to do your business.
3. How does office rent work in a new business?
While you are traveling around Africa, you are going to need to have a place back home to store your belongings while you are traveling. Some people might put this all in a storage unit and pay rent. Others will put their belongs into a friend's house and pay rent. Others might simply lock the front door of their house and continue to pay the rent or mortgage payments. This location, though, will be where you return when the trip is finished.
New business owners need this same type of space when they start their businesses. Most people will use some space in their homes. This space will usually be a den, converted bedroom or part of the basement. The Canadian tax system has a system to recognize the costs associated with this space.
The very general rule is that you will be able to recognize a portion of your home expenses as office rent in your business. The first step is to calculate the total costs associated with your home. This should include the mortgage interest, rent, the condo fees, the home insurance, the utilities, property tax and maintenance costs. Once you have these numbers, you calculate the total amount of space used in the house for the business. This amount in then divided by the total space available in the house. The ending result is the percentage of home expenses that can be claimed as office rent. For most of the businesses we deal with, the percentage amount is usually 10 to 15%.
4. How do automobile expenses work in a new business?
Pretend that you decide to take your compact car to Africa on your safari. If you were asked "How much did you spend on auto expenses on your trip?" you would probably come up with a total for the gas, the repairs and the maintenance while the vehicle was physically in Africa. You wouldn't add in the expenses of gas and repairs in Canada as these would not be costs associated with the Africa trip. Business auto expenses work in a similar manner to this.
Automobile expenses are very complicated for business owners. We won't try to explain all of it here. The important thing to remember is that you need to keep a lot of information in order to properly record the auto costs. You need to keep good records of how much you drive for business and how much you drive for personal. You also need to keep all of your gas and maintenance receipts. These receipts need to be the one from the gas pump or from the cashier. You cannot rely on your credit card statements to provide the evidence for these purchases. This then gives you the basic information that your accountant can use to calculate the auto expense for you.
The next step in the calculation is to identify those expenses that are business expenses and those expenses that are personal expenses. This is similar to our Africa metaphor in that you need to figure out how much of the overall costs for the auto are for business only. This is done be determining the total kilometres driven for business and the total kilometres driven for pleasure. These numbers are then used to determine what percentage of the total automobile costs can be claimed for business.
The other question that most new business owners ask is "What is a business trip". This is fairly easy for a new business owner as most of them operate out of their home. Thus, a business trip is any time that you leave the house to deal with a business matter. This can include traveling to meet with clients, getting supplies, depositing money in the bank or traveling to other cities to attend conferences. The amount of the mileage is basically from the garage of the house to the parking stall at the destination and back.
5. Do I need a business bank account for my new business?
If we did do a trip to Africa, it would be easier and simpler if you had one bank account for the trip only. If there were any questions about what you spent on the trip, you could simply go to the bank account and get a lot of the details that you would need. This is similar to your adventure in business.
Our suggestion is that you have a separate bank account that is used to record the deposits and the expenses for your business adventure. If you operate under a name other than your personal name, you will need a business account. This will probably require you to register a trade name at your provincial registry office. The separate bank account makes it much easier for your accountant to identify business only transactions. This ensures better accuracy.
6. What is a business meal?
On your African safari, you would include in your total costs all of the meals that you had while on the trip. You might also include those meals that you had before you left where you met with others to plan and organize the trip. You might also include a few meals after the African safari if they are a result of the trip. These might include meetings with a book publisher who is interested in your travel book or maybe meeting with an investor to review the results of the trip. In short, any of the meals that were required in order to plan or organize the trip can be claimed as an expense of the trip.
Sometimes it appears as though some small business owners go into business to simply claim all of their meals. They claim every meal they have as business meals whether the meal is at a restaurant, at home or in a field with the family. This is not very prudent.
So what can you claim as a business meal? Well, a business meal typically occurs in a restaurant. It usually involves two or more people although there is an exception. The reason for the meal is to allow the individuals involved to discuss topics related to the business. Typically, one person is trying to convince another person of a position or plan of action to follow to generate more sales.