The first installment of this series, Maximize Your Business Income Tax Deductions, discusses keeping track of your business expenses throughout the year, tax deductions related to the cost of doing business, and home business deductions. This article covers:
Once you've read through both of these tax articles, you'll have a complete list of business expenses that you can check before handing your receipts and documents over to your accountant or use to complete your own income tax form - focusing, of course, on maximizing your business income tax deductions.
First, let's take a look at deductions related to vehicles.
If you use a vehicle in the course of your business, have you deducted all of your business expenses related to your automobile(s)?
The cost of fuel, motor oil, and lubricants used in your business are allowable deductions. (This includes gasoline!) You can also claim the license and registration fees, insurance, and the cost of vehicle maintenance and repair. If you've borrowed the money to buy a vehicle, you can claim the interest on your loan as a business expense. If you've leased a vehicle, you can claim the leasing cost.
The catch with vehicle deductions is to be sure you distinguish between business and personal use. If you have a vehicle that you use for both business and pleasure, you can only claim the portion of automobile expenses related to business use as a business tax deduction.
For more details about these expenses and how to claim them as business deductions, see What Motor Vehicle Expenses Can You Claim on Income Tax in Canada?
To document these expenses properly and to make sure that you're claiming as much of a tax deduction as you can, you'll need to keep a vehicle logbook. How to Keep a Logbook to Claim Motor Vehicle Expenses explains how.
If you've used more than one vehicle to earn income over the past year, it's important that you keep separate records for each vehicle, and calculate your expenses accordingly.
The Motor Vehicle Expenses section of the Canada Revenue Agency's Business and Professional Income Guide explains the three classes of vehicles for income tax purposes. The CRA distinguishes between motor vehicles, automobiles, and passenger vehicles, and the class of vehicle you have can affect your allowable deductions.
For instance, if you borrowed the money to buy a passenger vehicle which you use to earn income, the amount of interest you can deduct is limited, as is the amount of leasing costs you can deduct.
If you have bought or are going to buy a vehicle for business use, you also need to be aware of Capital Cost Allowance, the tax method you must use to write off the cost of that vehicle over a period of years. How to Claim CCA (Capital Cost Allowance) on a Vehicle Bought for Business Use explains how to do it.The Guide also gives an example of how to calculate the amount of deductible interest on money you've borrowed to buy a passenger vehicle you've used for business purposes.
Now what about those income tax deductions relating to travel? Continue on to page 2.