Focusing on Tax Deductions

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Focusing on Tax Deductions for the Self-Employed and Entrepreneurs

It’s tax season again. It’s also the time when family and friends fire tax questions at me despite my protests that I’m not a tax accountant. I am a professional accountant who specializes in the real estate industry. With that out of the way, why am I blogging about taxation? No, I’m not dispensing tax tips, but what I am doing is giving you pointers on how to get organized so that you can prepare your own taxes easily, or you can hand over files to your accountant and know that you will receive all the deductions that you’re eligible for. PLEASE don’t consider anything I say as professional tax advice.

Most people dread doing their tax returns. I do too. How do we get past the dread and get started so we don’t miss all the deductions available to us?

First of all, what makes me qualified to write this blog? Of course, you don’t need to read this or follow any of the tips I will disclose, but I can assure you that year after year after year, I have had the pleasure (not!) of preparing numerous tax returns for family and friends and their friends because I couldn’t say no…and all au gratis too. No more…this door is now open to only a select few.

Let’s start with what you should do on January 1. I know it’s already March, but you can easily catch up with two months, not twelve. If you make it a habit to file your receipts and tax documents as you receive them, preparing your tax returns need not be a daunting task, especially for self-employed individuals and small business owners.

There are many reasons to stay organized besides making your life easier during the tax season. One of the best motivations to stay on top of your filing is that you may lose out on deductions that you are entitled to and thus pay more taxes than you have to…ouch. If you’re scrambling at the last minute looking for receipts or wracking your brain to remember all the expenses you incurred during the past year, good luck!

As a self-employed professional or entrepreneur, when you incur expenses to earn revenues, you can offset them against your income and thus reduce the amount of taxes you will pay. Ideally, you should record your expenditures on a spreadsheet as you incur them. However, even the best of us often don’t have that resolve to keep as up-to-date as we should. So if you can’t track your expenditures on a spreadsheet or software, then set up a filing system. Keep in mind that Canada Revenue Services (CRA) and most taxation authorities in other countries categorize their deductibles. Accordingly create your filing system so you can easily match your expenses to these categories.

Here’s the Canadian list for deductions:

General and Applicable to All Individuals:

  1. Retirement savings plan contributions (this is not an expenditure, but it reduces your taxable income)
  2. Professional and union dues
  3. Child care expenses
  4. Moving expenses (check for eligibility)
  5. Carrying charges for investments such as interest expenses incurred for your investments, safety deposit box rental, etc.
  6. Tax deductible donations and gifts

Business and Professional:

If you sell goods:

  1. Inventory purchases
  2. Salaries and wages attributable to your cost of goods
  3. Others (specify, must be related to cost of goods)

If you sell goods and / or services:

  1. Advertising
  2. Meals and entertainment (currently only 50% is deductible in Canada)
  3. Bad debts
  4. Insurance (e.g. liability, office contents)
  5. Interest on loans taken out for your business
  6. Business tax, fees, licenses, dues, memberships
  7. Office expenses
  8. Supplies
  9. Legal, accounting, and other professional fees
  10. Management and administrative fees
  11. Rent
  12. Maintenance and repairs
  13. Salaries, wages, and benefits
  14. Property taxes
  15. Travel (including transportation fees, accommodations, and allowable part of meals)
  16. Telephone and utilities (Internet could be considered here as well)
  17. Fuel costs (except for motor vehicles)
  18. Delivery, freight, and express
  19. Motor vehicle expenses based upon proportion driven for business use (not including capital cost allowance, i.e. depreciation of vehicle)
    1. Fuel and oil
    2. Interest expense
    3. Insurance
    4. License and registration
    5. Maintenance and repairs
    6. Leasing
    7. Other expenses (specify)
  20. Allowance on eligible capital property
  21. Capital cost allowance (e.g. depreciation of office furniture and equipment, business proportion of motor vehicle)
  22. Other expenses (specify)

If you use your home as your office:

  1. Business use of home expenses (claim a portion of your home expenses based upon the proportion used to conduct your business. In Canada, you may not create a business loss with these expenses.)
    1. Heat
    2. Electricity
    3. Insurance
    4. Maintenance
    5. Mortgage interest
    6. Property taxes
    7. Other expenses (specify)
  2. Capital cost allowance (e.g. depreciation of business portion of your house, get professional advice before claiming this one)

As you can see, the list is quite long. You can either create a file folder for each applicable category where you can drop the receipts/documents into their respective folders as you incur them, or you can dump the receipts into one or several folders if your transactions volume doesn’t require this kind of detailed sorting. Even if you have this list posted somewhere visible, you can refer to it every time you make a payment.

Your accountant will thank you for whatever steps you’re able to take to get organized. For those people whose tax returns have become the bane of my existence in March and April (you know who you are), read this and do me a favour for a change. Most importantly, your bank account will thank you.

Now go and get organized. If you have any other organizational tips, please do let me know.

If you like this post you might also like my post on budgeting.

Accountant With A Novel Twist

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Turn-cloak Accountant

How often do you come across an accountant who is also a writer? Apparently we are not quite as rare as I thought, but also not as prolific as say, lawyers wearing the writer’s hat.

So you may have guessed by now that I am an accountant. Yes, a bespectacled and boring CPA CGA with an MBA. And let me just say it before you do, “I am a bean counter.” But now I’m also a writer, a novelist, to be more precise.

How Can I Help?

Here’s the thing, many writers, like most artists, can’t find a single left-sided brain cell to perform tasks that are remotely accounting or business related.  I know that many writers would find my knowledge useful, so I’ve decided to share some of that in this post and in future ones.

This is my first post on accounting and writing. I’d like to start by sharing some tips on getting organized as an author and entrepreneur.

Some Common Q&A

Here are some of the most common questions I get from self-employed individuals and small business owners.

QUESTION: Do I have to set up a separate bank account for my business activities?

ANSWER: When you’re just starting out as a writer, you don’t need to incorporate (that’s a separate topic that I will delve into another time) or even register your writing as a business. Consider yourself as a self-employed professional, and therefore you don’t need to set up a separate bank. You do, however, need to track your author income and expenses.

QUESTION: How then do I keep my author income and expenses separate from my employment income and personal expenses?

ANSWER: Keep a record of your author income and expenses. If you know how to use Excel, set up a spreadsheet. It can be a simple three-column worksheet consisting of these three titles: DESCRIPTION, REVENUES, and EXPENSES. List in the respective columns, your revenues as you receive them and your expenses as you incur them. Obviously you can do the same thing with a notepad if Excel is not your forte. Tally up the REVENUES and EXPENSES columns at the end of each year and include them in your tax returns. You may need to hire a tax accountant.

QUESTION: How do I know which expenditure is a qualified expense for tax purposes?

ANSWER: Generally, any expense you incur to learn your writing craft (e.g. courses, conferences), to write (e.g. software), and then to promote it (e.g. book launch costs), may be considered a qualified expense. If in doubt, add the item into your record anyway, and then when you have to file your tax return, check with your accountant or verify with your taxation agency. This guideline is applicable for Canadians and likely for residents in other countries too, but always consults with a professional tax expert when in doubt.

QUESTION: How do I organize my receipts?

ANSWER: Here’s something that I do that takes a minute to keep organized. At the end of every year, I start a folder for the following year for all my receipts. You can subdivide the folder if you wish or set up two or even three folders instead of one—one for your regular employment related documents, one for writing revenues, and one for writing expenses. How many you set up is a matter of preference and also depends on how many receipts you expect to accumulate. As you receive a receipt, drop it into your folder. Then at tax filing season, take your folder(s) and the aforementioned log of your revenues and expenses to your accountant. You will save a lot of money in book-keeping fees!

Next time I’ll discuss how to create a budget and why you need one. In the meantime, check out how I’ve used my accounting background to create this really useful Excel workbook for tracking your novel’s characters and events. I use it all the time while I’m writing my novel. You won’t believe how it’s kept me sane whenever I’ve tried to remember an event I wrote about several months ago, or how old my characters are supposed to be in the context of a scene. I’ve built in automated formulas to calculate time lapses between events and each character’s age. Try it…it’s free.

So what pressing question do you have about your writing business?

DISCLAIMER: This post is meant to provide general tips to assist individuals in understanding and organizing their business records and is not to be considered as paid professional advice.

 

Picture credit: pixabay