An easy tax preparation checklist

An easy tax preparation checklist

Tax time is never really that much fun, but it’s a whole lot easier with an easy-to-follow checklist. So here’s one for you.

If you’re an unincorporated small business owner and freelancer, check out Checklist 1. If you’re an incorporated small business owner, scroll down to Checklist 2.

Oh, and we’ve got you covered whether you’re in the US or Canada.

Checklist 1: unincorporated small business owners and freelancers

In the US you’re required to complete Schedule C of the 1040 US personal tax return (due April 15). In Canada you’re required to complete a T2125 business income form (due April 30). Here is a general list of tips and advice on what you should prepare before filing your business tax return:

1. General information

Whether you are filing your own return or having an accountant file it, you will need to provide your basic information. Make sure your social security number, business name, business address and the fiscal year end are all at hand.

2. Proper documentation for expenses

Both the IRS (Internal Revenue Service) and the CRA (Canada Revenue Agency) require that you have sufficient documentation (receipts) for all expenses related to your business. In fact, these are required to be kept by your business for a minimum of 6 years in both countries. Another piece of advice regarding receipts is to ensure that all necessary information is accurately presented (i.e. category, vendor name, date, amount, etc.). Receipts should be kept for all expenses you expect to claim on your return. Some examples of expenses that need proper documentation to be claimed are:

  • Meals and entertainment (business related)
  • Accounting or lawyer expenses (professional services)
  • Office supplies

3. Bookkeeping and financial statements

When preparing for your upcoming tax return, having copies of your bookkeeping records and financial statements will make it easier to complete your return. If you are using an accountant one of the first things they will ask you for are your bookkeeping records, such as your journal entries, Profit & Loss Statement and balance sheet. If you are using a bookkeeper make sure you let them know to have theses documents prepared for when you meet with your tax accountant.

4. Notice of assessment

In the US, Notices of Assessment do not exist. Rather the IRS will send you a bill after you have filed your taxes only if they deem you to owe more taxes. This bill will include the amount you owe plus any interest and penalties.

A Notice of Assessment is a form every Canadian receives after submitting their income tax return. Your accountant will need your last year’s assessment because it will also have vital information such as:

These are all items you or your accountant will need when preparing your T2125 Statement of Business or Professional Activities. Knowing where your notice of assessment is stored will insure you aren’t scrambling before your April deadline.

5. Home office deduction

One very lucrative deduction that relates to running a small business involves a home-based office. If you work out of your home office, there are many tax deductions you can take advantage of. The first step is to determine the space in your house attributed to your home office. In the US you are required to submit a floor plan when claiming this deduction so make sure yours is handy. In order to calculate your deduction, consider the following:

Take the square-footage for dedicated home office space (A)

Divide by

Total square-footage of your home (B)


By the amount of allowable home office expenses (C)

In the US, home office expenses can be reported on form 8829 which is attached to schedule C of your 1040. In Canada, you can report them on your T2125 form. The items that can be claimed include:

  • Rent/mortgage interest
  • Property taxes
  • Repairs and Maintenance
  • Utilities
  • Insurance

Maintaining a monthly record of your home expenses will only make it easier when completing the home office portion of your return. Most of the expenses above require proper documentation for verification. So it’s important to keep records and give them to your accountant when preparing for your tax return. If you work out of your home, it’s important to be aware of this deduction.

6. Vehicle deduction

Another common deduction associated with small business owners is your vehicle expense. If you drive your own car, you need to keep a logbook of your mileage for business use. The IRS and CRA will not allow you to deduct car related expenses without a logbook. Logs can be kept manually or electronically. There are many apps available through Google Play or the App store for your mobile devices. You can also claim the following expenses related to your vehicle:

  • Fuel and oil costs
  • Lease payments
  • Parking fees
  • Toll charges
  • Repair and maintenance

Make sure that you have proper documentation to support your claims. Theses most likely will come in the form of receipts. In case of an audit by the IRS or CRA the first thing they will ask to see is the receipt of the claim in question.

7. Sold or purchased assets during the year

Lastly, make sure to keep track of all assets you’ve sold or purchased during the year. Make sure you have kept all the documentation relating to the purchase or sale. These should include purchase order, invoice, receipt or check, etc. This is important information that your accountant will need for completion of your year-end tax return. It will also cover you in case either tax authority decides to audit your return.

These are just a few tips on how you can prepare for your business income tax return in the US and Canada. If you would like more information on other deductions you may be entitled to as a small business owner in Canada, read our article on tax tips for the self employed.

Checklist 2: incorporated small business owners

If you’ve incorporated your business, there are some slight differences that you need to know come tax time. In the US, small corporations are required to file an 1120 U.S corporation income tax return on the 15th day of the third month after its year-end. In Canada, Corporate Income Tax Returns (T2) need to be filed by the corporation 6 months after its year-end and paid 3 months after. In order for theses forms to be completed you will need to provide basic information such as:

  • A copy of your Certificate of Incorporation
  • Federal ID Number also known as Employer Identification Number (US)
  • Business Number (these are the 9-digit numbers given when you incorporate in Canada)
  • A synopsis of the principle product/service provided
  • The list of your company director names, phone numbers and addresses
  • Shareholders names & Social Security Number (US) or Social Insurance Number (Canada) if individual, Federal ID Number (US) or Business Number (Canada) if corporation
  • Number & Class of shares owned
  • Key contact person other than directors provided

Your accountant will also need your bookkeeping files. As well, any expenses you claim during the year will need to be backed up with receipts. If you would like to file your own corporate tax return in Canada, click here to learn how to prepare a corporate tax return.

We have discussed a number of things a small business owner can do to prepare for their tax return. By organizing your documents throughout the year you will save yourself money and aggravation come filing season. If you would like to know how to prepare for your personal income tax you can look at our personal income tax preparation article. You can also visit my website for more information on Canadian and US taxes.

About the author: Allan Madan is a Chartered Accountant and Tax Expert at Madan Chartered Accountant, which he founded. He has over nine years of experience in public accounting and enjoys working with business owners, individuals and entrepreneurs.

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  • Andrew Wall

    Hi Allan,

    This is a great post with lots of useful information. We Created a similar checklist specific to Canadians.

    We have found that there are a few tax credits and deductions that often get overlooked. So we decided to help out by providing a personal tax checklistin hopes of making tax time become a little more routine, rather than the normal pain in the rear. (you can access the complete blog post at )

    Personal Tax Return Checklist

    Medical Expense Tax Credit

    Make sure you gather all of your eligible medical receipts together, as there are many different expenses that can be claimed, and more than you are likely aware of!

    Some expenses that are often overlooked include premiums paid for a health services plan through payroll deductions, or for a medical insurance plan to travel. You can claim eligible medical expenses to the extent that the amounts incurred exceed the lesser of $2,152 (for 2013) or 3% of your net income.

    Check the CRA website for a non-exhaustive list of eligible medical expenses.

    Donations and Gifts Tax Credit

    If you made any charitable, Crown, cultural or ecological gifts in 2013, then you can claim a tax credit related to those donations. The first $200 of donations is eligible for a 15% federal non-refundable credit in 2013 while the excess over $200 is eligible for a 29% credit. You may receive a slightly larger credit if you group two years of donations in one year, and you can claim a maximum of up to 75% of your net income for the year. Click here to read more about the new first-time donor’s super credit, which gives first-time donors an extra 25% credit for cash donations.

    Investment Tax Credit

    You may be eligible to claim tax credit on your investment income, if you fall under any of these rules. You can carry back the credit you earn for up to three years to reduce your federal tax, and you can also carry forward for up to 20 years credits earned in tax years that end after 1997.

    Working-From-Home Expenses

    Due to the changing technological landscape and the rising costs of commuting, working from home has become more commonplace especially for the self-employed and small business owners. You can deduct some of the workspace expenses you paid as long as the work space is used for the purpose of earning employment income, or used more than 50% of the time to perform your work.

    You can also deduct the proportion of the amounts you have paid for the maintenance of your home, heat and electricity, and cleaning materials.

    Family Caregiver Amount

    If you have a dependant with impairment in physical or mental functions, you may be eligible to claim an additional amount of $2,000 or more when calculating certain non-refundable tax credits. This amount has increased to $2,040 for 2013. For more information, click here.

    Moving Expenses

    If you moved in order to be closer to a new business or employment location within Canada in 2013, you may be able to deduct your moving expenses against the income earned from the new work location. Note: you must have moved at least 40 kilometers closer to your new location.

    RRSP Contributions

    The last day you can make a contribution to your RRSP for the 2013 year is March 3, 2014. If you want to know how much you can contribute for 2013, your RRSP contribution limit will appear on your 2013 Notice of Assessment or you can check online using CRA’s “My Account” service. Your contribution limit for 2013 is 18% of your 2013 earned income (to a maximum of $23,820) less your 2013 pension adjustment, if any, plus any RRSP room carried forward from prior years.

    Tip: Be sure not to over-contribute, as you can incur penalties for doing so. Make an RRSP contribution now to take advantage of the tax-free accumulation of funds in your RRSP, and deduct the contribution in a future year when you know you will have higher taxable income.

    Pooled Registered Pension Plan (PRPP)

    The PRPP is a new retirement savings plan for employees and self-employed individuals without access to a workplace pension. It offers investment and savings opportunities at lower administration costs. More information can be found on the CRA website here.

    Make sure that all sources of income are reported each year so that you’ll pay the appropriate amount of tax and avoid interest on underpaid tax. This also ensures that you’ll avoid the penalty that applies when you fail to report income in more than year.

    Disclaimer: this post is not to be misconstrued as sole professional advice for everyone. Please contact your accountant and tax advisor for advice related to your specific situation. If you have any questions about which tax credits and deductions you are eligible for, contact your accounting expert.