Top 10 Tax and Accounting Tips That Can Help Your Business
Phew! Personal tax season is done and dusted (well unless you are a Sole Proprietor, then you have a bit more time to file your tax return). But for the most part, our focus is now back on our client’s businesses and what we can do to help.
Here are some Tips, both Accounting and Tax, that can help make your business run a bit smoother.
- You deserve to be paid!! Make sure that you are diligent on collecting on the revenues that you bill. As a business, you are taxed on what you bill, not on what you collect. So make sure that you are keeping an eye on your Accounts Receivable balance to ensure that your customers are paying you on a timely basis. Not only does this help your cash flow, but it also makes sure that you have the money available to pay for things like your payroll obligations, income taxes and GST.
- Understand your financials Ensure that you are reviewing your Balance Sheet and Profit & Loss (aka the Income Statement) on a regular basis. This will help you keep a good eye on how your business is performing.
- We’ve found that watching your bank accounts and credit card statements can be misleading. It doesn’t allow you to see how you are doing with collecting your receivables, nor does it tell you if you have some larger expenses that have yet to be paid.
- This will also allow you to spot some trends in your business.
- And on the flip side. Are there items in your business that maybe shouldn’t be there?
- The flip side is thinking about potential Canada Revenue Agency queries that can occur and having to justify what an expense is in your business books and not a considered to be a personal expense.
- For instance, Meals & Entertainment expenses: Those daily trips to the local coffee shop for a pick-me-up coffee/tea is not a business expense. You need to demonstrate that the expense was incurred for business purposes. Did you meet someone there to discuss your business? Did you take someone else because you’re recruiting them to come work for you?
- Just remember, tax audits aren’t fun. Mainly because they are looking at a year that has passed and it doesn’t really help you into the future. They also take you away from your day-to-day operations. So the last thing that you want to have is a number of questionable expenses in your company.
- The system doesn’t need to be complex or time consuming.
- Digital Options: There are a number of apps out there that will help you streamline your document storage. Companies like LedgerDoc and HubDoc will allow your banks, mobile companies and anyone else that sends you digital invoices to send the information there and it will help you upload it into your accounting software. You can also take picture of receipts and upload it as well.
- Non-digital Options: This is where you have envelopes or a paper filing system to help you manage your receipts. One that I found useful and easy to manage is to have an envelope for each month. And on the back of each receipt, I’d write down what the expense was for and why. Nothing more than “office expense – paper for printer”. Or “Lunch with Diana – discussed FY2021.”
- Have your company pay for your life insurance In a nutshell, if your company pays for your life insurance, the proceeds come into the company on a tax-free basis. This can help you ensure that there are funds to pay for any tax liabilities that may be incurred on your death, but it also creates a pool of funds that can be distributed out to your beneficiaries on a tax free basis. The expense isn’t a deductible expense for tax purposes in the business, but it already isn’t a tax deduction to you personally. The additional benefit is that the premiums are being paid with pre-tax dollars vs after-tax dollars.
- Keep personal expenses separate from business expenses Too many business owners intermingle the personal and business accounts and find it really difficult after the fact to keep it straight and remember which were legitimately business. It also creates a really messy paper trail if you ever need to present these bank statements to CRA – do you really want CRA going through your personal bank accounts? Even as a sole proprietor business, you should set up a business bank account and reserve one of your personal credit cards strictly for business use. This way you only have two accounts to manage for your business as opposed to going through all of your personal accounts to find all of your business expenses at the end of the month or year.
- Keep your bookkeeping updated It is much easier to categorize transactions when they are top of mind! Keep your bookkeeping current and set aside a few hours at the beginning of each month (each week or every two weeks even) to categorize transactions. Or have a bookkeeper do this for you. Either way, it’s much easier to remember what a transaction was for and categorize that receipt from 10 days ago than 10 months ago.
- Make your instalment payments If you are required to make instalment payments for the 2023 year, make sure these are made in a timely manner. Interest compounds daily and at a fairly high rate (9% for corporate clients on overdue amounts and 7% for personal taxpayers/sole proprietors)
- Mileage Logs – A necessary evil One of the most common areas that a CRA audit will look at is the amount of vehicle expenses that are being expensed through a company. And if you’re a sole proprietor, they look at how many kilometers you’ve used your vehicle for work vs the entire year. The number one item that they will ask for is a mileage log. Here is a link to a CRA video where they talk about what an auditor would be looking for and why. It’s a bit long (42minutes), but it does cover off why it’s so important to have one. And the consequences of not having one. If your vehicle is owned by the company don’t forget to calculate the standby charge. The CRA also has a handy calculator that helps you figure out what your taxable benefit would be. If you don’t think you can keep up manually with this, there is an App for that…check out MileIQ or similar Apps on your phone that work like a dating App! Swipe left for business or right for personal, then you get a report at the end of each month to know what is deductible in your business.
- From basic to sophisticated How do you know when you have graduated from excel level bookkeeping to an accounting program like QBO or Xero? In our professional opinion, if you have 100 transactions or less in a year, just stick with excel, the cost of a subscription is not worth it. As your business grows and you need more accounts and better reporting for other stakeholders like banks and investors, you are probably ready to graduate to a program like QBO or Xero. If in doubt consult with your accountant to see if you might be ready for this software.