Small Business Tax Deductions: Tax “Traps” to AvoidYou know that you are eligible for small business tax deductions, but you might not know how to avoid these common tax deduction “traps”.

Many small business owners understand the importance of taking all of all of the tax deductions possible off of their business’s revenue to avoid paying taxes that they do not legally owe. However, fewer small business owners realize that if they improperly categorize certain items or expenses on their tax returns that they could end up paying a lot more money than they owe in taxes. Not understanding this can cause a lot of small businesses financial devastation and losses that they do not need to go through.

The following are 5 mistakes that small businesses make that can put them into a tax deduction trap that can cost them money that they do not need to be paying in taxes along with tips on how to avoid them.

Be careful which employees you classify as “Independent Contractors”

It’s vital that you understand which employees you have to claim as employees versus those that you are claiming as independent contractors. If you are classifying employees as “independent contractors”, the government may view this as a tactic that you are using to avoid paying payroll taxes on employees that actually do work for your company.

Understanding the legal differences and the ramifications of making errors in classifying your employees can save you a lot of fines, non-compliance penalties, and back taxes that may bring your company serious financial problems in the future.

Consider your home office deductions carefully

Consider what you are taking off of your taxes as “home-office” deductions. Many small business owners mistake home office deductions what expenses actually fall into this specific category. The “home-office” classification of tax deductions if very specific and limited, so understanding if your specific tax deductions fall within that category is a must before you take them off of your taxes. Mistaking deductions that do not count can result in a further government investigation if they do not determine that your deducted expenses are 100% legal and legitimate.

Be careful how many “Miscellaneous” deductions you file

Small businesses that file a disproportionate amount of “miscellaneous” category tax deductions or those that have a very long list of random deductions are much more likely to get noticed by the CRA. Keeping good, accurate records will help ensure that you are not likely to get examined by the government for a bunch of small “miscellaneous” calculations that may not be specific or able to be determined if they are 100% legal or not.

Separate your personal expenses

Being sure that you are separating your personal and business expenses is another vital way to ensure that you are not making illegitimate claims on your taxes of items that are actually not able to be deducted. Your deductions must be related to your business and your business alone. Personal expenses do not count as part of your business tax deductions. Filing those tax returns separately will help keep you from getting into hot water with the government over claims that they may feel are personal and not part of your business.

Ensuring that you have separate bank accounts, credit cards, monthly bank statements, etc. will help ensure that your business is a separate entity from your personal finances.

Ensure that your taxes correspond with the type of business you have filed as

Ensuring that you are filing your taxes in conjunction with the type of business you claim to have is also important. Each type of business is different and the taxes you pay are affected by the type of business you have. Whether you claim to be a sole proprietorship, partnership, or a corporation will dictate the status of your tax filings for your business.

In order to make sure that your taxes are filed correctly, ensure that you are filing as the same type of business you claim to be for taxation purposes.

Consider the assistance of a professional accountant

While some small business owners opt to file their taxes alone, many others wish to have the assistance of a professional who can ensure that you are filing your taxes properly. Especially if you are a new business owner, paying a little extra for this assistance can save you a lot of penalties, fines, and headaches in the future if you were to misfile your taxes by trying to do them on your own.

Understanding the common tax traps that many small businesses fall into can save you quite a bit of money in fines, fees, and penalties that would be assessed if you made (even innocent) errors in your tax filing.

For more information on how to properly file your small business’s taxes or to get assistance with your taxes please feel free to contact us.

E&E Professional Accountants has years of experience in assisting businesses with their accounting needs. We are founded and managed by an experienced corporate auditor and a former CRA tax auditor. Feel free to contact us for assistance with all your accounting and bookkeeping needs.

Tax planning services Canada

Hussein Ebrahimjee

Having worked for the Canada Revenue Agency (CRA) as a tax auditor and as Manager at a public accounting firm, Hussein brings along a wealth of experience in Tax planning, Compliance and public accounting.
Hussein Ebrahimjee