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about e-ccounting
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Business Scenario
- Taxes for the Self-Employed |
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I'm self-employed, when are my taxes due and what do I need to do?
HELP!
(This was a question I was asked on an evaluation at a workshop I gave.)
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| Answer |
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Although I touched on this topic in the February 2008 issue, here I will focus on the actual form required as a business owner.
(for details on the Feb 2008 issue, go to www.accountrain.com, choose the e-ccounting tab for back-issues of accountrain's monthly newsletter).
As a sole proprietor your taxes are completed based on the calendar year and are due on April 30th. You are still using a General T1 return, but now have an extra form to provide the details of the business.
The form is called "Statement of Business Activities" (T2125 (previously the T2124)). On the first page, line 101 is for any T4'd income. On the same page, you will note an area with Professional, Business, etc. income There will be two lines to fill out (line 162 for the gross income, and line 135 for the net income.)
The difference between the gross and net income is outlined on the form mentioned above.
The T2125 is divided into five sections (detailed below):
Income, with GST
Expenses with predetermined categories
Capital Costs (large expenses, ie computer, furniture)
Home expenses (if applicable)
Car expenses
Income with GST
This is straight forward, it includes all sources of income, including the GST. There will be another line to reduce this figure by the GST collected on Sales.
This section will also allow adjustments for inventory and Cost of Goods, if applicable.
Expenses with predetermined categories
The categories include:
Advertising
Office Expenses
Business Tax, fees, licenses
Telephone & utilities, to name a few.
Hint - This list will not necessarily match yours. As consistency is a rule in accounting, I suggest you print out your list, beside each account number indicate what line you are placing that total on to the income tax form. Use this as a guide when performing this task for next year's return.
Home expenses
If you have a home-based business, you can deduct a portion of home expenses. The percentage will be determined by how much space you are using, which is calculated by room count, or actual square footage. (this percentage should remain the same from one year to the next, unless the usage changes.)
The items that can be expensed are:
rent or mortgage interest
insurance
repairs & maintenance
property tax
utilities
Car expenses
If you have a business, you can deduct a portion of your car expenses. The percentage will be determined by how many kilometers you use for business purposes. The best way to track this is to maintain a distance logue. (unlike your home expenses (if applicable) this percentage should change from year to year.)
The items that can be expensed are:
lease or loan payment
insurance
repairs & maintenance
gas
license
CCA - Capital Cost Allowance
Also known as fixed assets, or just "big ticket items". Items would include, Equipment, Tools, Furniture, Computer, Automobiles, etc. These expenditures do not belong on the Income Statement as they have a life of more than one year and therefore must be amortized over several years (which is determined by accounting rules, not by your estimate). Therefore the form will track the percentage of each item / class and depreciate it over time.
This can be confusing in the beginning, if so get assistance when initially setting up, especially to ensure you have chosen the correct class for each item type.
If any of this is not clear or you need further explanation, hire an expert to assist you.
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| Accounting Tip |
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There are several software packages available to help with tax preparation. One of Canada's most popular is QuickTax.
Note there are several versions of QuickTax and that the store clerk may not be able to assist in helping you determine which one is best suited to your needs. There is a checklist provided on the outside of the box, this should help narrow down your choices.
If you are still confused it is worth asking a colleague or professional to help you choose.
Please note there are other software packages available to prepare Canadian income tax, ie TurboTax, but when searching, QuickTax is by far the most noteable.
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| Did You Know ? |
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If you are self-employed your tax return is not due until June 30th. However if you owe money, it is due on April 30th.
Therefore since you have to actually do your taxes to determine whether or not you owe any money, you may as well submit the return by April 30th.
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For more Did You Knows? |
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| Definition |
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Sole Proprietor
Unlike a partnership, a sole proprietor is a business owned and run by one person. For tax purposes any revenues and expenses are recorded on the owner's personal tax return.
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For more definitions ... |
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| Sandy's Recommendations |
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Do as much of your return as possible. Once done, have a professional review it. If it's a fairly basic return, perhaps H&R Block.
However, for more advanced returns I suggest booking an appointment with a tax expert, preferably a Chartered Accountant.
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Next Issue - Business Banking
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Small Businesses - Do you need a business bank account?
Learn:
The advantages and disadvantages of having a business bank account.
How to account for business expenses without a separate business account.
Where to order business (bank) cheques.
7 different things to consider when ordering business (bank) cheques.
Why a bank reconciliation is so important.
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