What you need to know about taxes for your new home-based business

Taxes for a home-based business can quickly get confusing. From charging sales tax to deductions you should claim, this is what you need to know.

What you need to know about taxes for your new home-based business

Operating as a sole proprietorship

If you’re just starting your home-based business, you’ll probably be operating as a sole proprietorship.

  • What that means is you and your business are like one person. In other words, for tax purposes, the business income is your income.
  • If you have another income, such as a job, your total sales minus your business expenses and deductions will be added to your total personal income amount when you file your yearly tax return.
  • That’s why any admissible expenses and deductions will be extremely important to report.

Office expenses

You’ll need to keep receipts and keep track of expenses for everything from pens to printers.

  • Stationery and small supplies will be declared as “office expenses.”
  • Equipment such a printers, desks and cabinets that depreciate every year will be considered in the section named “Capital Cost Allowance” and a portion of the original cost can be claimed on a yearly basis for a certain number of years.
  • Sometimes, deferring a Capital Cost Allowance expense to another year can be beneficial as it will offset a higher income once your business picks up.

Mortgage interest, property taxes and rent

If your home is your principal place of business or if you use a portion of your home for business purposes only, you can expense a portion of your mortgage interest, property taxes or rent.

  • This amount will be calculated based on the portion used of the overall home, as well as if you used it on a full-time or part-time basis.
  • You can’t deduct more expenses than what you make, but you can carry expenses forward.
  • Your sales may be low in the beginning and you may not feel it is important to deduct expenses such as this, but in the second year as your business starts taking off, you’ll probably welcome any additional expenses that you can carry toward to lower your income.

Other home expenses

Just as a portion of your mortgage interest, property taxes or rent can be expensed, so can a portion of your Internet connection bill, phone bill, heating or electricity bills and maintenance or cleaning costs.

Insurance

You should expense your home business insurance on your tax return.

  • This is different from home insurance.
  • If you have home insurance and are running a business from home without any specific clauses allowing for commercial activity, you could be effectively nullifying your home insurance.
  • Make sure that your activities are covered by your policy. You may be able to get a joint home and business insurance. In that case, you’ll be able to expense a portion of the insurance costs.

Vehicle expenses

If you start off by using a personal vehicle for your business, you won’t be able to expense every cost.

  • You’ll need to keep track of your “business” kilometres versus your personal “kilometres” in order to support the expense claims you make for gas, maintenance, repairs, insurance and interest collected from the purchase of the vehicle.

Collecting sales tax

If you’re just getting your home business off the ground, you don’t necessarily need to get a tax number right off the bat.

  • However, if you plan on making large sales in the beginning, you may want to do it anyway.
  • Realistically, you will only really need to start collecting taxes when your sales reach or go beyond $30,000 (before expenses) in one year.
  • And when you do register for a tax number, you’ll start collecting sales tax and be able to claim input tax credits for the GST or HST that you pay, which can be a considerable benefit.
  • Just don’t forget to submit your quarterly reports and amounts when you do.

What an accountant can do for you

Finally, you might find it helpful to set up a quick meeting with your accountant who can guide you through the set up and give you the quick breakdown for how to sort out your paperwork.

  • Setting up a system right from the beginning will require a bit of extra effort, but if you know how to sort, file and track your expenses right from the start, you’ll save a lot of time, money and effort when it comes time to file your taxes.
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