Determining which expenses you are eligible deduct can be confusing at first. There are many different deduction types available, especially for small businesses. Among the most common categories of business expenses are operating, home office, auto and personal.
Determining A Business Expense
In order to qualify for a business expense, the expense must be related to your trade or business. The CRA requires that the expense is reasonable and is used to generate revenue in order to be a tax-deductible expense. Be honest about your expenses and keep good records. If you are a small business, be sure to use a business account or card to separate business from personal expenses. The last thing you need is the CRA knocking on your door to nix your business deductions.
Operating Expenses
The first type of business expenses are operating expenses. These are all the expenses directly related to conducting your trade or business. Common operating expenses include materials, supplies, advertising, accounting, legal fees, rent, meals, entertainment and insurance. The types of expenses you will have will depend on your business. For example, if you are in the construction industry, you would have high materials expense. However, if you run a consulting company, you would have more office expenses.
Home Office Expenses
Another category of expenses is home office expenses. With the recent pandemic, many small businesses transitioned to a work from home schedule. This means that home office expenses were now tax deductible. If you use your home more than 50% of the time when you work or your home is exclusively used to conduct work and you regularly hold meetings there you can deduct home office expenses. Expenses like mortgage, rent, property taxes, home insurance, condo insurance, strata and maintenance fees all become eligible for a tax deduction.
Vehicle Expenses
Canada allows you to deduct vehicle expenses if you are a small business. The total amount of business expense you can claim is based on the percentage of businesses mileage compared to total mileage for the year. Expenses like fuel, repairs, insurance, license and registration, depreciation and toll charges are all deductible. Just like with all business expenses, you need to keep good records in case of an audit. Good records can include receipts or invoices.
Personal Expenses
Other common business expenses that may be eligible for a deduction include personal expenses. Personal expenses such as home phone bills, home internet bills, cell phone bills, supplies, software licenses, small tools, travel and some meals and entertainment can become eligible for a tax deduction. If you are using the above expenses for business purposes, you are entitled to take a tax deduction.
Summary
Business expenses are a great way to deduct the costs associated with your trade or business. Determining what expenses are eligible is critical in order to avoid a letter from the CRA.