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So you’re an entrepreneur? Being an entrepreneur is a tough gig (although very rewarding). Lucky for you, there are some tax breaks associated with being an entrepreneur.
Top Tax Deductions for Entrepreneurs
What is a sole proprietor?
Many entrepreneurs start off as sole proprietors. Being a sole proprietor means that YOU are the business. You are in control of all aspects of your business and you receive all the profits earned. Any profits or losses generated by the business will appear on your personal tax return. There are many deductions you can use on your tax return to lower your taxes payable.
5 Top Tax Deductions
1. Home Office Costs
Many entrepreneurs work out of their home, rather than in a corporate office setting. Did you know if you work from home you can use a tax deduction? If your home is your principal place of business (used more than 50% of the time) you can deduct some of your household costs.
For example, if your office is 10% of the square footage of your home, you may be eligible to claim 10% of:
- Your mortgage interest (not principal) or rent
- Property taxes
- Home Insurance
- Home maintenance
Deducting these expenses will help to lower your taxable income. If these expenses are higher than your income for the year, you can carry forward the expenses to deduct from future income.
2. Operating expenses
If you spend money to earn self-employed income then it qualifies as a legitimate expense and you can deduct it from your taxable income. The list of eligible business expenses is HUGE. Here are some notable expenses that you can deduct:
- Accounting & legal fees
- Business licenses
- Meals and entertainment (allowable up to 50%)
- Vehicle expenses
3. Capital assets
You may be asking ‘what is a capital asset’? A capital asset is any property used for business that will last for many years but will lose its value. Examples of a capital asset are furniture, computer equipment, or a building purchased for business use only.
You can deduct capital assets over a period of time, based on Canada Revenue Agency’s (CRA) specified rates.
The depreciation rates for 2017 are approximately:
- Building (4% per year)
- Furniture and fixtures (20% per year)
- Software (50% per year)
- Computers and computer equipment (55% per year)
- Vehicles (30% per year)
For example, furniture purchased for business use would fall under Class according to CRA. 20% of the cost of the equipment is deducted each year until the value equals $0.
4. Interest on Student Loans
It is never fun to have student loans. Luckily, certain interest payments on your loans are deductible on your tax return. The loan must be a federal or provincial loan to qualify. Unfortunately, student loans issued by a bank are not eligible.
Don’t worry if you haven’t deducted interest from your taxable income in the past. You can go back and deduct up to 5 years of interest payments.
If you have no taxes payable for the current year, you should not claim your student loan interest. You can carry forward this interest and apply it on your return for the next 5 years.
5. Loss Carryovers
As a new entrepreneur, your business may not be generating revenue yet. Your business losses can be used to offset your taxable income.
Loss carryovers can be used to offset taxable income for up to 20 years. If you have reduced your taxes owing to $0 for the current year, you can use your losses next year to reduce your taxes owing.
If you haven’t done so already, be sure to keep track of all the finances related to your business. Create a spreadsheet to track your expenditures and revenues. Be sure to file away any copies of receipts and invoices. Beginning to track this now will make it easier to claim any losses in future years.
Are you doing your taxes yourself? I personally recommend TurboTax for filing your own taxes.
Do you have any additional deductions you utilize? Share in the comments below!