As a business owner, it's important for you to know what business expenses you can deduct. This will help you determine what records to keep for tax time, allows you to deduct all the business expenses you are entitled to claim, as well as ensures that you are compliant with tax regulations.
According to the Canada Revenue Agency, a deductible business expense is "any reasonable current expense you paid or will have to pay to earn business income".
Below are business expenses you can deduct:
- Bad debts
- Business tax, fees, licences, dues, memberships, and subscriptions
- Delivery, freight, and express
- Fuel costs (except for motor vehicles)
- Legal, accounting, and other professional fees
- Maintenance and repairs
- Meals and entertainment
- Generally, only 50% of business meals are deductible
- Office expenses
- Salaries, wages, and benefits
- Telephone and utilities
- Purchases (Cost of Goods Sold)
- Goods purchased for resale
- Motor vehicle expenses
- You can only claim the business portion of your motor vehicle expenses
- Allowable motor vehicle expenses include fuel, insurance, and repairs/maintenance
- It's recommended that you keep a mileage log
- The formula to calculate the business portion of your motor vehicle expenses is (Business use km / Total kms) x total motor vehicle expense
- If you have a home-based business or you do more than 50% of your work at home, you can deduct a portion of the operating costs of your home
- Operating costs include utilities, property tax, insurance, mortgage interest, and rent
- The formula to calculate your home office expense is (Size of office / Total size of home) x Total operating cost of home
- Capital cost allowance
- Depreciable property, such as buildings, vehicles, and equipment, wear out or become obsolete over several years. The cost of these assets need to be deducted over several years.
Important Points to Consider
Note the word "reasonable" in the definition. What might be a reasonable expense for one business may not be for another. An important question to ask yourself is, would you still try to claim this as a business expense if you knew you were going to get audited?
If an expense has both business and non business components, only claim the business portion. For example, if you use your cell phone for business and personal calls, you shouldn't claim the entire expense as a business expense.
- All business expenses should supported by documentation.