For all kinds of businesses, including small ones, tax planning is important. Firms that do it well get to legally keep more of their profits. As well as gaining a better understanding of how the tax system works, which makes it less likely that they will experience problems with the tax authorities.
Read on to find out what tax planning is and learn about the best ways to do it. Doing so will enable you to get the most out of this small business practice and give yourself an edge over your competitors.
Tax Planning for Small Businesses
Tax planning involves looking at your business´s financial affairs in detail with the goal of reducing how much tax your company pays. The idea is not to do anything illegal, just rearrange the way you work and how cash flows through your business.
What can be done varies greatly. But the following approaches are a good starting point for the vast majority of firms, so are worthy of your consideration:
- Income deferral
- Expense acceleration
- Character alteration
- Income splitting or division
You can find out even more about each of these, by clicking through and reading the in-depth article we have written about tax minimization planning. As you will see, there are plenty of ways to legally relieve the tax burden. It is part of wealth management and something every private citizen or business owner can do.
However, you do need to be a little careful. Unfortunately, the press, social media groups and forums are full of people sharing loopholes that are not legal. You do not want to end up following one of those and inadvertently break the law. If you were to do so, you greatly enhance the chances of your being audited by the CRA. At which point your mistake will be uncovered and you could face penalties. In some cases, even prosecution.
If you want to know which tax planning strategies are legal for small businesses, the best approach is to consult with a CPA, like us. When it comes to tax matters it is better to be safe than sorry.
Strategies for Tax Planning for Small Businesses
There are a few things that every small business owner ought to be doing. Tasks that will ensure that they can file accurate taxes, which is the best way to avoid penalties and audits. Here are the main ones:
- Collect, record, file and keep your receipts – You need these to prove during an audit that the expenses you have offset are genuine. They have to be the original receipts. The CRA won’t accept credit card statements as proof of business-related expenses.
- Keep accurate records of all incoming and outgoing transactions – On a daily basis record the cash coming into and out of your business and assign proper reasons to each amount. If you do not do it daily, you will forget where the money went or came from and not have accurate records to use for your tax return.
You should also take a look at and be sure that you understand the following opportunities to potentially reduce the amount of tax you pay:
- Small business tax deductions – At the time of writing this, tax deductions apply to the first $500,000 of income. Understanding how much you can deduct will help you to keep track of how much cash you need to have in your business account to pay your tax bill. We explain small business tax deductions in detail here.
- Maximize your capital cost allowance – It is also important to understand what your capital cost allowance is and learn how to maximize it.
- Spread your losses – If you have a non-capital loss in any given year, potentially you can decide which year to use that loss. In many cases, you will be able to lower your income tax payable.
- Mind your RRSP, TFSA contributions – Every business owner should be planning for their future. Making RRSP, TFSA contributions are part of that. But how and when you make those payments can have a significant impact on how much tax you pay.
- Incorporating your small business – As your business grows and evolves the opportunity to reduce your taxes may be there. In some cases, incorporating your business will prove to be a good idea. It could result in deferral of taxes paid.
Why Get a CPA to Handle Your Small Business Tax Planning
Sound corporate tax planning is essential to success. Using the advice that you get from a properly qualified CPA will benefit your small business in other ways. Good tax strategies can prevent problems with:
- Accounting and bookkeeping processes
- Tax filing
- Cash flow
It also makes sure that you:
- Are following a legal approach to tax planning
- Avoid inadvertently using illegal tax evasion techniques
- Are informed of all tax options available for your small business
- Comply with the data management and privacy laws surrounding your financial records
Consult with a Faris CPA tax expert to make sure you are complying with regulations while reducing your tax payables
Call Faris CPA To Do The Tax Planning For Your Small Business
Faris CPA offers expert taxation and business advisory services. Find out more about us, here.
We have longstanding connections and working relationships with lawyers, bankers, insurance companies, and financial experts. So have a breadth of knowledge that you can tap into.
Our team works especially hard to keep up with the latest industry trends, business practices, and professional standards. We have a great deal of experience of helping small businesses with their tax affairs and other financial matters.
Contact us today and let us get started with helping you to do the same.
You can schedule an accounting assessment through our website’s online contact form.
Or, if you prefer to do so call our phone number. We explain all of the different ways you can contact us here.
PRO TIP :
“A little advice now can save you a lot of headaches tomorrow. Consult with a CPA today even if your business is still starting small.”
FAQ’s on Tax Planning for Small Businesses
How do I know if my business is considered a small business?
In Canada, there are several definitions or what is considered to be a small business. Banks, associations, the tax office, and other government departments all categorize firms in different ways. So, when dealing with each one you will have to check their criteria to see if they consider you to be a small business or not.
I’m a self-employed entrepreneur, is that the same as having a small business?
Being a self-employed entrepreneur is not always the same as having a small business. You will almost certainly be treated differently by various organizations including the tax authorities and banks. It is important to understand the differences and act accordingly. Particularly when dealing with the tax authorities.
What is the Ontario small business deduction (SBD)?
The Ontario small business deduction (SBD) reduces the amount of income tax certain types of firms pay. Firms that are categorized as small businesses pay a lower rate on the first $500,000 of their turnover. As of January 1st, 2020, the lower rate of Ontario corporate income tax is 3.2 percent instead of 3.5 percent. But you have to qualify to secure the deduction. An experienced CPA can help you to do that.
