23- Income Tax

Consider the Following Tax Tips

End of The Year Tax Considerations

For starters, remember that you should get in all of your charitable donations. Several charities will be asking for your help, especially around the holidays. So keep in mind that you will want to walk away with the necessary paperwork once you donate. If you have household goods to donate, make sure you get a receipt. You will want a letter from the charity stating the amount of money you have given them this year. Also know how much you can legally deduct. Talk to your tax adviser to determine this number. It will all depend on previous donations and whether you are filing with your spouse or as an independent filer. Donations from a business will also differ so determine these things before you run into tax problems later.

If you are a student yourself or have a dependent in school, make sure you get student loans nailed down. Know exactly what has been borrowed in anticipation of this statement. You may be qualified to receive interest deductions from federal student loans.

If you have moved for a job, make sure that you have all of the necessary paperwork and receipts in order. Even if you do not itemize, you can deduct the cost of moving to a new job, given that you moved more than 50 miles.

Deductions for home improvements may be deducted. As part of new green initiatives enacted by Congress, certain improvements to make your home more energy efficient can be deducted from your taxes. So if you are considering adding new solar energy mechanisms or adding more energy efficient windows to your property, try doing them before the end of the year.

Clever ways to save taxes

Operating a business is tough enough without having to pay more than your fair share of taxes.  Some tax-cutting strategies for small businesses.

Making interest a tax deductible:

Complicated new rules surrounded the detectability of interest, but the basic rule still remains the same:  To deduct the interest on a loan, the loan must be taken out for business purposes. So, if you have a personal loan ( which the interest is non-deductible), you might pay it off with funds from your business, then take out the equivalent amount as a business loan (on which the interest is deductible).  Similarly, in cases where you have concurrent business and personal loans, dedicate available funds to paying off your personal debts.

Save on Family EI: 

Many small business owners know the tax benefits of paying salaries to family members.  However, they often forget the rules on employment insurance premiums on those salaries. In some cases, family members would not be eligible to collect EI if they lost their jobs.  If they can’t collect EI, why pay the EI premiums every month to the government?  This can mean EI savings for the business.

Deduct All Business Expenses:

This sound obvious, but many business owners fail to deduct all the business expenses, fearing those costs will be disallowed because the business fails the “Reasonable Expectation of Profit”  However, recent decisions by the Supreme Court of Canada have forced Ottawa to change its thoughts concerning REOP.  As long as there is no personal element to your business, your business losses are tax deductible.

Recognize Capital Items From Expense Items:

Treating a capital addition as an expense could expose you to additional tax. Example: if you purchase a hand held saw for $200. this should be categorized as a tool expense not capital asset.  On the other hand, if you purchase a manufacturing building and have to renovate, the cost associated with the renovation should be set up as capital asset and  added to the original cost of the building.

Incorporate – Maybe Not Yet?

Under the right circumstances, incorporation  can save you money.  Under the wrong circumstances it will only cost you money and administrative costs.  To Know when to incorporate, ask yourself this simply question:  “Can I personally afford to leave some of my company’s profits in the business, thus deferring that income?” If the answer is yes, then incorporation may be for you. As a sole proprietorship any amount the owner withdraws from the business for personal use is not deamed as taxable income, only the net income (income – expenses = net income) of the business is subject to tax.   when you are incorporated you become the employee of the business, therefore you are subject to payroll taxes (not including EI)