Everything you need to know about tax deductions but were afraid to ask

Unless you have a background in accounting, we really do suggest that every business owner gets a bookkeeper or an accountant, but even if you’re in the hands of true professionals (like your huumans team!) it’s still good to have an understanding of what tax deductions your business is eligible for. After all, the more you know, the better you can strategize your spending - and the more efficient your business will be.

What is a tax deduction?

In simple terms, a tax deduction is anything that lowers the amount of income tax that your business is required to pay. Always remember this one key phrase: your goal in business is to maximize after-tax income, not total income. So just what does that mean in reality? Well, let's say your business made 180k this year compared to 150k the year before; that’s great, right? Things are tracking up! Unfortunately like most things in business, the answer is... 'it depends'. If you took in an extra 30k of income but paid more taxes on that income, then all that extra work was for money you don’t get to keep. That’s why it's important that business owners try to focus on the after-tax profit of their business rather than just income alone.

OK, so deductions are important. So what can I deduct?

The short answer is: almost any expense your business incurs can be written off as a tax deduction if it is involved with the operation or upkeep of your company. Pretty much anything that is a 'personal expense' is a total no-go for the CRA, but the good news is there’s still plenty to keep your huumans team busy (hey, even your huumans subscription is tax-deductible!).

The CRA has a basic outline of what it considers to be reasonable deductions here: https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partnerships/business-expenses.html.

Now don't worry - you don't need to memorize this list of deductions. That's the job of your huumans team. But it is worth brushing up on some of the areas relevant to your business when you have any spare time. For example - does your business operate a vehicle? Then get to know the basic way a vehicle (and it's running costs) works from a tax point of view. While your huumans team will always make sure to maximize such deductions, being able to work out smarter ways to operate a vehicle and make decisions around running costs will pay dividends for your business long term. Remember the more you know the more efficient your business will become, so do reach out to your huumans team if you have any questions and let them point you in the right direction.

So how does this help my business?

Remember, there are people (like us!) who spend their whole lives working on understanding tax law for small businesses, so don't be worried if you can't understand a specific deduction, or feel lost even where to start. The important first step is getting even a very basic understanding of what deductions your business can utilize most effectively, which can give you a pretty significant leg-up against your competitors. Knowing what kinds of expenses are and are not tax-deductible can help you keep better records (better records means better support from your huumans team), and try to plan for ways your business can continue to grow while getting to keep the most amount of cash possible. A basic understanding can also keep you out of trouble with the CRA. You really don’t want to make the mistake of putting down a personal expense as a business expense - and while your huumans team will always work hard to make sure that doesn't happen, it helps if you know the difference between them (and it saves your huumans team having to query everything!).

In short, tax deductions are a fundamental aspect of running a successful, efficient business, and the more you know about it the better your huumans team will be able to help your business grow.

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Jay Dort is a Data Analyst at huumans

What is huumans?
A 'Modern', cost-effective bookkeeping service designed specifically for small business owners, huumans provides same or next business day support, guaranteed weekly reconciliation and fixed, transparent monthly pricing. Your business numbers, directly calculated from your constantly reconciled accounts, are presented in a free, easy-to-understand, on-demand, shareable dashboard - and like your billing, it can be managed online whenever you find it convenient. Offering the most cost effective small business managed payroll services in Canada, we also provide specialized discounts for startups and new businesses, along with dedicated solutions for franchises.