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:
- How much tax you currently owe
- How much tax you have paid
- Tax credits you received
- RRSP contribution limits for the next year
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)
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
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.
More great ideas to grow your business
Check out these tax expert tips to save you money.
Find out how to create a business expense.
Learn how to manage your expenses.