It’s the most wonderful time of the year! For tax accountants. That’s right tax season is here and many entrepreneurs are scrambling to get tax ready. The reality is most entrepreneurs don’t want to deal with accounting and tax – that is just one of the many hats entrepreneurs must wear. Here are the top 5 mistakes entrepreneurs make when it comes to taxes.
- Choosing the right set up for your business.
Whether to incorporate or run as a sole proprietor is not a black and white answer. There are four main factors to consider in choosing what the right set up is.
- Do you need the legal limited liability protection?
- Will you effectively utilize the tax deferral mechanisms of a corporation?
- Do you need a loan or funding?
- Are you able to handle the higher administrative/legal/accounting fees associated with a corporation?
Anyone who advises you without discussing each of the above is not providing full due diligence to your needs.
- Do it Yourself Bookkeeping.
Entrepreneurs can absolutely do their own (basic) bookkeeping, and many do to save a few (hundred) dollars. However, bookkeeping has principles and practices that must be followed. Bookkeeping tells the story of your business, what is working, and most importantly what is not working. While you need your bookkeeping to file your taxes – absolutely – it is really the story of your business. Yet, it is often the task most avoided by entrepreneurs, until they cave and outsource it – and even then most do not provide the documentation in a timely manner. These days there are many apps that can help you make the data capture portion of bookkeeping a little easier. Schedule in the time into your calendar as you would any other client commitment. However, data capture is only half the battle. There are certain accounting principles you must follow as well as criteria to comply with CRA. The CRA has a great resource to connect with a liaison officer to understand your responsibilities to CRA. For more information and to sign up for a free in-person visit or a group seminar, visit www.canada.ca/cra-liaison-officer. Tax Tip: use the same account names as what is required on your tax return!
- Mixing personal and business
As a sole proprietor there is no legal concept of business vs personal as there is only one legal entity. Everything of the business is, inherently, everything of the sole proprietor. However, it is good practice to still maintain an element of separation between business and personal. Separate bank accounts and separate credit cards will help justify all business related transactions and make the bookkeeping process easier. If you are using your home or car for business purposes, you also get the added bonus of being able to write off a portion of these as business expenses. However, make sure you are complying with criteria behind these write-offs. Business use of home and Business use of Vehicle are two highly audited accounts.
- Hobby vs Business
A business is an activity you carry out with the intention of profit, and there is evidence to support this intention. This is the definition provided by CRA. Many people start writing off expenses, especially the fun ones like meals and entertainment, business use of home and business use of vehicle, but they’re not really working their business. Trust me, if you’re working your business you won’t even question this sentence. So when they show recurring losses on their taxes, and CRA comes knocking, they cannot show evidence to support working the business. The result? Expenses can be disallowed and taxes reassessed; interest and penalties would be levied from the date of submission, not from when CRA disallowed it. There is no magic number of years of recurring losses that CRA allows. As a business owner, you should be assessing the viability of your business after more than a few years of losses anyways!
- Employee vs Independent Contractor
This is a toughie. When you hire an employee you have to set up a payroll account, add said employee to the payroll account, calculate their wages, deduct CPP and EI, remit payroll taxes and issue a T4! However, when you hire an independent contractor, they do the work and issue you an invoice. You pay that invoice, like any other bill, and move on with your business. It’s no wonder most small business owners prefer hiring independent contractors as it’s the cheaper (no owner CPP and EI contributions) and administratively easier to manage. However, there are rules to consider when determining whether someone is an employee or an independent contractor. In a nutshell – if you provide the tools, the direction and the resources to do the work, under your set standards, they are an employee. To say the life of an entrepreneur is not easy is an understatement. Marketing, HR, Accounting & Taxes (yes they are two separate things!) on top of all the other administrative and daily responsibilities you need to undertake. Your accountant should be your right hand in the financial aspects of your business to help guide you through all of these obstacles.
Shalini Dharma is an accountant on a mission to help entrepreneurs fall in love with their numbers. More than just filing taxes, Shalini educates entrepreneurs on bookkeeping, accounting and tax do and do not’s to help them not only pay less taxes but grow their business!