Top 10 small business deductions and tax expenses

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As someone who is self-employed or owns a small business, filing your year-end taxes might feel a little overwhelming—especially if you have to cut a hefty payment to the government. But if you take advantage of a few business deductions and expenses, you can lower that bill (and your stress level).

From assets and liabilities to deciphering your books, your year-end filing requires plenty of preparation. Not to mention handing over an often-hefty check to the government when it’s over and done with. However, there are a few things freelancers and SMBs can do to alleviate their tax burden.

While there are dozens of business deductions and expenses freelancers and entrepreneurs could qualify to use in their year-end filing, we’ve done the legwork to round up 10 of the most common deductions that could help save your business some serious cash.

1. Rent and utilities

Do you lease office space for your business? Regardless of whether it’s a desk in a co-working space or an entire commercial building, freelancers and entrepreneurs can claim business rent as a tax deduction.

The same goes for any utilities you pay for your office space—yes, the government cuts you some slack for keeping your lights on. This includes electricity, gas, telephone bills, and water bills.

2. Home office

For many of us freelancers, our homes pull double duty as both a residence and our workspace. Many freelancers and solopreneurs work from home, so their residence is technically also their place of business. Don’t fret—you can claim a portion of the cost of your home office as well.

Referred to as the business-use-of-home deduction, you can deduct a portion of expenses for your home office. But don’t confuse these basic costs of running a business with your personal rent and utilities. The two are completely separate deductions, so make sure you treat them as such in your paperwork.

Some of the typical costs you can include as part of business-use-of-home deductions are:

  • Utilities (heat, electricity, water, Internet)
  • Maintenance
  • Mortgage interest
  • Property taxes
  • Home insurance

Before you jump on this deduction, however, make sure your home office meets the basic criteria. According to the CRA, your residence must fall into one of these two categories:

  • it is your principal place of business; or
  • you use the space only to earn your business income, and you use it on a regular and ongoing basis to meet your clients, customers, or patients.

To calculate the amount you should deduct for your home office rent and utilities, let’s break it down to square footage. For instance, let’s say that you have a home office that is 10×10 feet in a house that’s 1,800 square feet. Then your calculation of the allowable portion of business-use-of-home expenses would be: 100 divided by 1800 = 5%. The personal use portion would be = 95%. So, you’d deduct 5% of your rent and utilities as your business-use-of-home expense. For more info, visit the CRA’s example for help calculating the amount of this deduction.

3. Advertising expenses

Whether you’re a solopreneur or have a growing team, you likely spent some of your hard-earned dollars advertising your business last year. If so, those expenses could be deducted on your year-end filing.

You can deduct a few types of advertising costs for this category: paid ads in Canadian print publications (like newspapers) and on TV and radio stations.

There are, however, a few certain restrictions on claiming these costs:

  • You can deduct the entire costs if your advertising is directed to a Canadian market and the original editorial content in the issue is 80% or more of its total non-advertising content.
  • You can deduct 50% of the expense if your advertising is in a periodical directed to a Canadian market and the original editorial content in the issue is less than 80% of its total non-advertising content.
  • You cannot deduct expenses for advertising directed mainly to a Canadian market when you advertise with a foreign broadcaster.

When it comes to online advertising such as banner ads and paid promotional Facebook posts, those costs are 100% deductible.

4. Insurance

Many entrepreneurs and freelancers have insurance policies to protect themselves, their business, and any equipment. And many of these expenses can be deducted on your filing.

That includes:

  • Liability insurance premiums
  • Commercial property insurance costs
  • Business interruption insurance
  • Insurance on any equipment (other than vehicles, which is deducted as part of vehicle expenses)
  • You can deduct a limited portion of life insurance premiums if the policy is used as collateral on a loan related to your business

5. Legal and professional fees

Did you seek advice from a lawyer to start up your business? Or did you rely on an accountant to file your taxes last year?

If so, you can likely claim those professional fees as a deduction on your year-end filing. You’re able to deduct the cost to consult external pros like lawyers and accountants, as well as membership fees to professional, trade, and commercial organizations (think union dues).

6. Retirement plans

For those freelancers or self-employed workers contributing to personal retirement plans, you can likely deduct those payments.

Note that all accounts must be qualified retirement plans: that means RRSP and PRPP contributions (with appropriate receipts as proof).

7. Health insurance premiums

Staying fit and healthy can get pretty pricey—especially if you’re self-employed. That’s why freelancers and small business owners can deduct the costs of their health insurance premiums in some cases.

There are a couple of caveats to review before you can claim those health plan premiums as deductions on your tax filings.

For self-employed workers, you need to meet one of the following criteria:

  • If your net self-employed income is more than 50% of your income
  • Your income from other sources is less than $10,000

8. Bad debts

No matter how hard you may try, many small businesses end up with a certain amount of “bad debts” each year. Essentially, bad debts are any liabilities you can’t collect on. For many self-employed workers and freelancers, that often means outstanding invoices your customers simply won’t pay.

As long as you’ve counted any bad debts as part of your income for the year and the debt was accrued in the fiscal year you’re filing for, you can claim these debts as deductions.

9. Office supplies and tools

It takes innumerable supplies to keep an office functioning. As a small business owner or freelancer, you need certain tools to stay sharp and ready to work—think stationary, pens, notebooks, and the litany of other items found on your desk.

While many of these items are relatively inexpensive, these small costs can add up to some serious savings when used as a deduction on your year-end filing. Some of the more obvious (and not-so-obvious) supplies and tools you can include in this category are:

  • Pens and pencils
  • Stationary
  • Staplers and paper clips
  • Stamps
  • Day-to-day shipping for products
  • Courier expenses
  • Cleaning supplies

10. Salaries and wages

As your business grows, you may want to bring on hired hands to run certain aspects of your biz. Not only do those employees and contractors provide a valuable service (i.e. their skills and work), but you can also deduct their gross salaries and wages.

Use Line 9060 on Form T2125 to deduct these wage-related expenses:

  • Payroll taxes like:
    • Canada Pension Plan (CPP) and/or Quebec Pension Plan (QPP) contributions
    • Employment Insurance (EI) premiums
    • Workers’ compensation accounts
  • Any premiums paid for employee illnesses, accidents, disabilities or income insurance plans
  • Any salary you pay your child, spouse, or common-law partner

Additional information on business deductions

As we mentioned before, these aren’t all the business deductions you can claim in your year-end tax filing. This list is just the tip of the iceberg when it comes to reducing your tax burden.

Need a little more information to make sure you’re maximizing your claims? Visit the CRA’s comprehensive list of deductible business expenses.

As someone who is self-employed or owns a small business, filing your year-end taxes might feel a little overwhelming—especially if you have to cut a hefty payment to the government. But if you take advantage of a few business deductions and expenses, you can lower that bill (and your stress level).

From assets and liabilities to deciphering your books, your year-end filing requires plenty of preparation. Not to mention handing over an often-hefty check to the government when it’s over and done with.

However, there are a few things freelancers and SMBs can do to alleviate their tax burden.

While there are dozens of business deductions and expenses freelancers and entrepreneurs could qualify to use in their year-end filing, we’ve done the legwork to round up 10 of the most common deductions that could help save your business some serious cash.

1. Rent and utilities

Do you lease office space for your business? Regardless of whether it’s a desk in a co-working space or an entire commercial building, freelancers and entrepreneurs can claim business rent as a tax deduction.

The same goes for any utilities you pay for your office space—yes, the government cuts you some slack for keeping your lights on. This includes electricity, gas, telephone bills, and water bills.

2. Home office

For many of us freelancers, our homes pull double duty as both a residence and our workspace. Many freelancers and solopreneurs work from home, so their residence is technically also their place of business. Don’t fret—you can claim a portion of the cost of your home office as well.

According to Publication 587 (Business Use of Your Home), you can deduct a portion of expenses for your home office. But don’t confuse these basic costs of running a business with your personal rent and utilities. The two are completely separate deductions, so make sure you treat them as such in your paperwork.

Some of the typical costs you can include as part of business-use-of-home deductions are:

  • Utilities (heat, electricity, water, Internet)
  • Maintenance
  • Mortgage interest
  • Property taxes
  • Home insurance

Before you jump on this deduction, however, make sure your home office meets the basic criteria. According to the IRS, your home must meet these two basic requirements:

  • Regular and exclusive use
  • Principal place of your business

You can also lean on this IRS guide to use their simplified or regular method to calculate these costs.

3. Advertising expenses

Whether you’re a solopreneur or have a growing team, you likely spent some of your hard-earned dollars advertising your business last year. If so, those expenses could be deducted on your year-end filing.

Whether you spent your advertising budget last year on business cards, billboards, or anything in between, you can claim those expenses.

You can also claim:

  • Promotional and branded swag (think keychains, pens, coffee mugs, tote bags)
  • Website costs (hosting, design, maintenance)
  • Online advertising (banner ads, Facebook ads and other paid social media ads)

4. Insurance

Many entrepreneurs and freelancers have insurance policies to protect themselves, their business, and any equipment. And many of these expenses can be deducted on your filing.

That includes:

  • Liability insurance premiums
  • Commercial property insurance costs
  • Business interruption insurance
  • Insurance on any equipment (other than vehicles, which is deducted as part of vehicle expenses)

5. Legal and professional fees

Did you seek advice from a lawyer to start up your business? Or did you rely on an accountant to file your taxes last year?

If so, you can likely claim those professional fees as a deduction on your year-end filing. You’re able to deduct the cost to consult external pros like lawyers and accountants, membership fees to professional organizations and even costs for business books, industry publications and online subscriptions

6. Retirement plans

For those freelancers or self-employed workers contributing to personal retirement plans, you can likely deduct those payments.

Note that all accounts must be qualified retirement plans: that means you can deduct contributions to plans like SEP IRAs, SIMPLE IRAs, and 401(k)s.

7. Health insurance premiums

Staying fit and healthy can get pretty pricey—especially if you’re self-employed. That’s why freelancers and small business owners can deduct the costs of their health insurance premiums in some cases.

Those who own their own solopreneur business or own more than 2% of their S corporation also have some deduction options here.

If you’re self-employed, you can deduct the health care premium payments for yourself, your spouse, dependents, and any child under the age of 27.

8. Bad debts

No matter how hard you may try, many small businesses end up with a certain amount of “bad debts” each year. Essentially, bad debts are any liabilities you can’t collect on. For many self-employed workers and freelancers, that often means outstanding invoices your customers simply won’t pay.

Depending on whether you sell goods or services, bad debts you can claim include:

  • Funds you’ve loaned to employees, vendors, or other businesses
  • If your business sells goods, you may deduct the costs of unpaid purchases
  • The same rule applies to businesses who sell services

9. Office supplies and tools

It takes innumerable supplies to keep an office functioning. As a small business owner or freelancer, you need certain tools to stay sharp and ready to work—think stationary, pens, notebooks, and the litany of other items found on your desk.

While many of these items are relatively inexpensive, these small costs can add up to some serious savings when used as a deduction on your year-end filing. Some of the more obvious (and not-so-obvious) supplies and tools you can include in this category are:

  • Pens and pencils
  • Stationary
  • Staplers and paper clips
  • Stamps
  • Day-to-day shipping for products
  • Courier expenses
  • Cleaning supplies

10. Salaries and wages

As your business grows, you may want to bring on hired hands to run certain aspects of your biz. Not only do those employees and contractors provide a valuable service (i.e. their skills and work), but you can also deduct their gross salaries and wages.

If you’re a business with employees, you can deduct:

  • Payroll taxes like:
    • Employer contributions for social security and Medicare (FICA)
    • Employer contributions for federal (FUTA) and state (SUTA) unemployment taxes
  • Salaries and wages like:
    • Bonuses and commissions
    • Employee benefits (life insurance, education reimbursements)
    • Per diems and allowances
    • Contract wages for workers paid more than $600 in a year

Additional information on business deductions

As we mentioned before, these aren’t all the business deductions you can claim in your year-end tax filing. This list is just the tip of the iceberg when it comes to reducing your tax burden.

Need a little more information to make sure you’re maximizing your claims? Check out the IRS guide to deducting small business expenses.

Categories:   Year end guide
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Lindsey Peacock
By Lindsey Peacock
Disclaimer

The information and tips we’re sharing in this article are meant to be a starting point for your year-end tax prep, so you can be informed and feel confident when working with your accountant. Be sure to check with a tax expert in your country or region for any specific advice you need, as each business (and tax district) is different. As our lawyers would say: “This article is for informational purposes only. It should not be considered legal or financial advice.”