Accurate record-keeping and smart spending are not just good business practices, but they directly impact your bottom line. Knowing which expenses your business can claim as business deductions directly influences your net income for taxation. Below we outline generalizations for identifying viable business write-offs,  describe the difference between capital and current expenses, and identify common expenses with special calculation methods.

Costs of Doing Business

It’s a common misconception that owners can simply “write off” a multitude of day-to-day expenses under their business. The Canada Revenue Agency, however, looks at the reasonableness of each expense in earning business income. Deduct only expenses that are incurred to own,  operate or grow your business or prorate expenses based on the portion that is used for business purposes.

Capital or Current Expense

The simplest way to differentiate between capital and current expenses is by time. In most instances, a capital expenditure is for something that serves the business over the long term, such as a building, piece of equipment or a major renovation. These expenses may be financed with payments over a predetermined period of time or paid for outright. Since capital expenses create a lasting impact on the business, they are usually deducted over multiple years.

The Canada Revenue Agency sets the capital cost allowance on many depreciable assets. This means a predetermined dollar value or percentage can be written off per fiscal year based on the classification of capital expenses.

Current expenses are the day-to-day expenditures required to keep the business operating at its current level. These short-term items, such as a service, repair or consumables, are deducted in the year they are incurred.

Expense Considerations

Home Office 

If you operate a mobile or home-based business and keep a home office in your principal residence, you can claim office expenses against your business income. Calculate this deduction in proportion to the area of your home that is used for business purposes. Eligible expenses include a portion of utilities, maintenance, property taxes and mortgage interest.

Meals & Entertainment  

A general rule for the meals and entertainment deduction is that 50% can be claimed as a business expense. Track each expense in this category with details on why the expense was incurred and with who to substantiate this deduction.

Memberships

Unless you can demonstrate that a membership is required to operate your business, avoid claiming them as business expenses. Professional association dues or fees for your business to participate in a networking or community organization, such as BNI, Rotary or your local Chamber of Commerce, are reasonable business expenses. If the membership is focused on food & beverage, leisure or recreation, it’s unlikely that it would be considered a reasonable business expense.

Vehicle Expenses

Whether you own a vehicle personally or as a business, vehicle expenses incurred while using the vehicle to earn business income can be deducted. If the vehicle is used explicitly for business purposes, the deduction for fuel, maintenance, registration and even leasing costs is fairly straightforward. When a portion of the use is personal, the deduction must be prorated.

For more information on vehicle deductions for business use, check out our blog “How to Write Off Your Car for Business

Your expenses are an important part of running your business. Contact your accountant or reach out to us here at McNabb Lucuk LLP for advice on making claims for specific expenditures to ensure you are getting the most out of your deductions.