Running a small business can keep the owner very busy and the last thing they want is to have their taxes audited. Knowing the rules and regulations of the Canada Revenue Agency (CRA) and following a few simple recommendations will help owners avoid being audited.
Keep Detailed Records
Small business owners must be detail oriented and keep records of all business transactions. All sources of income and all the business related expenses must be recorded in order to keep track of the profitability of the business and to keep accurate tax records. Business owners can keeps business records with a commercial software program or with a spreadsheet such as MS Excel based on the volume of the transactions.
Owners or their accountants should record and maintain the books at least monthly and more often when necessary to keep records up-to-date. If the owner chooses to use a spreadsheet for record keeping it should include columns for income and for each type of expenditure such as rent, utilities, and operations expenses.
Business travel, auto expense, and meals and entertainment expenses should be recorded as this type of expense is deductible. However, auditors normally are very sensitive in these areas.
CRA always can enquire about any taxation year up to seven years after its filing, it is important to be able to produce business records if needed. Using a commercial software program will help simplify your record keeping process and keep your records organized.
Report All Business Income
It is important to be able to produce records of all income earned. Income figures need to be exact and all income even all cash payments must be recorded. During an audit the CRA will investigate sources of income. The CRA may also take note of assets owned or if an unusual amount of vacations are taken if the amount of income is insufficient to cover their costs and raise a red flag.
Income must be reported and taxes paid by freelancers if they earn more than $500 in a year.
Don’t Mix Business with Pleasure
Never mix business expenses with personal expenses. Personal expenses are not tax deductible. Equipment that is purchased for the business should be photographed, record business related mileage for cars, and if family accompanies the business owner on a business trip only business related expenses are deductible. If there is any question if an expense is personal or business it is best to err on the side of caution and not claim it.
Compare Expenses to Income
Small businesses owners can use a vertical analysis to compare if expenses are relative to gross income. A ratio analysis will compare a small business with others in the industry that are the same size. Owners can find sites online for this type of comparison.
File All Required CRA Forms
When completing CRA forms, be sure to fill out the entire form. Blank spaces could be reason for a CRA tax auditor to request an audit of the business. Remember to sign all forms before submitting them to the CRA.
Make sure you understand the difference between Fiscal Year and a calendar Year. A fiscal tax year is 12 consecutive months that end on the last day of any month.
Small business owners must keep records consistently. All expenses and income must be recorded weekly and CRA forms must be filled in completely and signed. Deductible expenses must be business related only. Small business owners should do a ratio analysis to make sure their business is on track with industry businesses of the same size. Following these tips will help small business owners avoid an audit.
Budget Accounting can provide all of your accounting and tax needs. Call (905) 508-5007 today.