If you’ve run a business or know someone who has, chances are you’ve talked about what you can write off as an expense as it also reduces the taxable profit that you’d have as a business owner. It could have gone something like this:
According to the CRA, In general, you can deduct any reasonable ordinary expenses you incur in earning business income. We will now focus on what an ongoing or current expense is and how to determine if it was incurred to generate business income to be treated as deductible. As with most accounting and tax matters, there are exceptions and one-off situations, so we’ll look at some of these, and we’ve also provided a useful links section where you can find out more.
Talk to a tax accountant near me. Avail accounting and tax services from a renowned accounting firm for more clarity on specific cases.
Current vs. Capital expenditure
The idea is that ongoing or current expenses are usually deductible in the current year (immediately), while capital expenses are deductible over the life of the purchase (over several years). Some criteria for distinguishing between current expenditure and capital expenditure are:
Lasting benefit – Capital expenditures provide a benefit that lasts for more than a year. Ongoing charges recur after a short period of time.
Maintenance vs. Improvements – Capital expenditure improves the property from its original condition, and ongoing or current expenditure only restores the property to its original condition.
New goods vs. Repair of existing assets – Capital expenditures are usually new property or equipment, while ongoing or current expenditures generally repair some of the existing equipment or property.
Here are some examples to help you use the criteria:
Capital
- The purchase of a computer is a new asset and has a lasting benefit, so it could be considered a capital expense.
- Replacing wooden stairs with concrete stairs would probably extend the life of the stairs, so it could be considered a capital cost.
- Buying a new phone is also a capital expenditure because it has a lasting benefit and is a new device.
Current
- Fixing an old computer to make it work again would be an ongoing or current expense as it is maintenance and not an upgrade.
- Replacing the wooden steps with wooden steps would return the stairs to their original condition, so they could be considered contemporary.
- Paying a monthly bill to use the phone would be a recurring expense because it recurs after a short period of time.
Talk to a tax accountant near me. Avail accounting and tax services from a renowned accounting firm for more clarity on specific cases.
Expenses incurred to earn business income
Another issue to consider is whether the expenses are reasonable and are incurred to generate income from the business. For example, it would usually be reasonable for a software developer to charge for internet costs, but it may not be reasonable for a contract worker to do the same. The question is whether the expenditure is used in the business to generate income or grow the business. Another component is that there may be expenses that are attributable to the business, but there may also be personal components that you should not be able to claim. For example, if you use the same mobile phone for work and private purposes, it would be reasonable to only charge the business part of the fee. It may need to be estimated based on whether the estimated business use is reasonable or not.
Using the same thought process, personal expenses that cannot be linked to business income (personal travel, food, clothing, etc.) would not be eligible to be termed as business expenses.
Specific exceptions and rules
We often get questions about these specific rules and exceptions. Read below:
Meals and entertainment – When meal and entertainment expenses are incurred for business purposes, they are still only 50% deductible for tax purposes. It is important to track the business reason for M&E spend and who it was with. If you pay for a meal because you forgot lunch that day, it’s most likely not deductible.
Vehicle Expenses – You can deduct expenses incurred to operate a motor vehicle that you use to generate business income. This includes items such as fuel, insurance, registration costs, leasing costs, and maintenance. Again, the main consideration is that personal use is not eligible, so you may need to split the cost between personal and business use. Personal use includes travel to and from your usual place of work.
Home Office Expenses – You can deduct home office expenses if the space is your main place of business or you only use it to earn business income and regularly meet with clients, customers, or patients there. You can deduct some of your utility costs, maintenance costs, property taxes, and mortgage interest. To calculate the portion you can deduct, use a reasonable basis, such as the square footage of your workspace divided by the total square footage of your home.
Gym and Golf Memberships – In most cases, club membership fees are not deductible if the primary purpose of the club is for dining, recreation, or sporting activities.
Bottom line
If you need more help and want to discuss the prospects for your business, talk to a tax accountant near me. Avail tax services from a renowned accounting firm in Canada.