In the Income Tax Act, there are many categories of allowable business deductions. As a small business owner, you are more likely to deal with five of those categories on a regular basis.
The common categories of deductions that you need to know as a business owner are :
General deductions – These are your common everyday business expenses such as advertising, stationery, salaries and wages etc. They are often very easy to identify.
Meals and entertainment – The Income Tax Act allows a business owner to deduct 50% of the cost of any meals that are incurred for business purposes. For example, many of you might take a prospective client out to lunch to negotiate a sales deal or you may buy food for your staff if they work overtime. Then you are allowed to claim 50% of the expense as a tax deduction. However, CRA expects you to maintain documentation. You MUST write the name of the person that you met with and the company name on the receipt or else the deduction will not be allowed. For example, Joe Soap – Sales Director – ABC Corp.
Home-Office – If you work from home and preferably if you have a designated office space in your home, you are also allowed to claim a portion of your home utilities, mortgage interest/rent, home insurance, internet and property tax as a business expense. You must maintain detailed documentation.
Vehicle Expenses – If you use your personal vehicle for business travelling, you are allowed to deduct the business portion of your fuel costs, vehicle insurance, licensing etc. However, CRA expects you to maintain a detailed logbook of your business mileage and they always request it during a tax audit.
Capital Cost Allowances – For any large items like machinery, equipment, furniture etc. You cannot deduct the full cost of the items in one go. Instead, you depreciate/write-off these items over a number of years. CRA has different depreciation rates for each category of machinery and equipment. For example, if you bought a Class 8 category machine, then your tax depreciation will be 20% per year or if it was a Class 10 category machine, then the write-off will be 33%. There are different categories of capital equipment depreciation rates depending on what type of equipment your business buys.
