If you’re building your business, congratulations. This step comes with many challenges, and overcoming them to find success is a major achievement. One thing you’ll have to learn is how to file business taxes. The truth is, tackling it the right way couldn’t be more crucial (since failing to do so could lead to serious consequences).
Here are five things to know if you’ve never filed business taxes before…
1) Know the basics
You may decide to hand your taxes off to a financial professional. If you do, it’s still a good idea to have a basic understanding of how business taxation works—and how it will affect your budget.
Start by learning your federal tax rate, which is lower for incorporated businesses (typically between 9-15 per cent) than for individuals. At the provincial level, the Ontario corporate rate is 11.5 per cent. That said, there’s some good news for smaller businesses. There’s currently a deduction in place that allows you to pay 3.5 per cent on the first $500,000 of your active business income.
Of course, knowing deadlines is also crucial. Your tax returns will be due six months after the end of your fiscal year. If there’s a balance to pay off, you have two additional months to do so. Other must-know dates include your personal income tax and RRSP contributions deadlines.
Whether you’re a business owner or you’re planning to become one in the near future, check out some of these relevant recent posts.
- How Government Policy Will Impact Business in 2022
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- Working with a Business Broker: The Basics
2) Decide whether to defer
If you’re just getting started, you may not need to worry about this just yet. That said, it’s never too early to find out about tax-planning strategies that could help you reinvest in your business. That’s where deferrals come in.
Let’s say you’re bringing in more income than you need to withdraw for your salary. By leaving that money in your business, you can defer the personal income taxes you have to pay on it for a period of time. You can use it to invest in your business (or other investments) while remaining in a lower personal tax bracket for the time being. It’s a way of (potentially) maximizing your after-tax income.
3) You’ll need to hold onto your records
Ledgers, financial statements, purchase receipts, and sales vouchers. These are just some of the records you’ll need to keep after the end of the last tax year for which they’re relevant. Typically, a period of six years is sufficient, though that’s not always the case.
Sometimes, you’ll need to hold onto your financial records indefinitely. As just one example, if you have documents that provide historical information that could have an impact on the sale or liquidation of your business, you should keep it long-term.
Are you preparing to purchase a restaurant business? If so, check out our ultimate guide to doing so here.
4) Know what you can deduct
When you’re thinking about business taxes, don’t forget about deductions. They can range from advertising and office costs to business-use-of-home expenses (which can go towards things like heating, insurance, and cleaning supplies for the portion of your home you use exclusively for work).
By taking advantage of your deductions, you can reduce your tax bill. We can all agree that’s a good thing, especially given how quickly the costs of running a business can add up.
5) A financial advisor can help
Financial expertise is invaluable, especially when you’re navigating the ownership of a business for the first time. Of course, taking this step can help you create a savings plan for retirement (something that’s often built into your role when you have an employer).
In addition, the right professional can find tax strategies to benefit you—from income splitting to creating the right salary/dividend mix. If you’re not entirely sure what the last sentence means, finding an advisor could make your life a whole lot easier!
Are you in the early stages of planning a business? When you’re ready to find the right space, get in touch to start the process of finding it.
