When talking about the deductible business expense when running a business, business owners are sometimes confused. Today we are going to clarify the confusion. Generally speaking, any reasonable expenses you incur for the business to earn income are deductible. According to the CRA, the following may be considered when determining operating expenses:
- advertising
- bad debts
- business tax, fees, licenses and dues
- business-use-of-home-expenses
- capital cost allowance
- delivery, freight, and express
- fuel costs (except for motor vehicles)
- insurance
- interest charges
- maintenance and repairs
- management and administration fees
- meals and entertainment (allowable part only)
- motor vehicle expenses
- legal, accounting, and other professional fees
- office expenses
- other business expenses
- property taxes
- rent
- salaries, wages, and benefits (including employer’s contributions)
- supplies
- telephone and utilities
- travel
A long list of items. But still not clear. Let’s look at some key expenses items that are picked up by CRA auditors.
Membership dues
Joining a membership in a prestigious sport club is a shortcut to build your business network. However, you cannot deduct club membership dues (including initiation fees) if the main purpose of the club is dining, recreation, or sporting activities.
Advertising
Getting your name out is the key to start your business. You can deduct expenses for advertising, including advertising in Canadian newspapers and on Canadian television and radio stations. However ,You cannot deduct expenses for advertising directed mainly at a Canadian market when you advertise with a foreign broadcaster.
Life insurance premium
In most cases, you cannot deduct your life insurance premiums. However, if the life insurance policy is required as collateral for a loan related to your business, you may be able to deduct a limited part of the premiums you paid.
Capitalized items
Any items that bring long term benefits are considered capital property. In some cases, you may apply for a loan to acquire the property. So, the interest on the loan to acquire the property should be capitalized. What you need to do is to add the interest to the cost of the property. Do not deduct the capitalized interest as a current expense.
Meals and entertainment
There is not too many industry that does not require socialize with clients/partners. As a result, you may happen to invite clients for a dinner/lunch. The money that you spend on food, beverage and entertainment is deductible but limited to 50% of the lesser of the following amounts:
- the amount you incurred for the expenses
- an amount that is reasonable in the circumstances (watch out the “reasonable”, CRA may come back and challenge if the expense amount is way too high.)
Entertainment expenses include tickets and entrance fees to an entertainment or sporting event, gratuities, cover charges, and room rentals such as for hospitality suites. For some industries, meals for certain events can be fully deductible.
Hope you are clear on the deductible expenses. Any questions, give us a shout or drop us a note.
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