Category Archives for "Business Income Taxes"

Basic Issues to Consider When Equipment Leasing

By Randall Orser | Business Income Taxes , Small Business

Big or small, when purchasing new equipment (such as tools, forklifts, furniture, computers, copiers, etc.), there are basic issues that you need to consider. This can be from the confusing selection of financing options, to the potential drawbacks.

The first thing to think about is whether to buy the equipment outright, with cash on hand or a line of credit, or lease it from your bank, leasing company, equipment distributor, or manufacturer.

You require much less cash up front when leasing, sometime even 100% financing is available, and is permitted under your loan agreements with your existing bank. Your monthly payment is generally lower when leasing rather than purchasing outright. The reasons are:

  • Leasing companies offer longer lease terms than that of a bank equipment loan.
  • You only pay for the right to use the equipment during the lease term, usually shorter than the equipment’s total useful life.

The flexibility of leasing is also better as you usually have three options at the end of it:

  • Buy the equipment, a buyout amount or percentage is usually specified in the agreement
  • Continue leasing, or finance the buyout with a term loan
  • Return the equipment, using it as a trade-in on new equipment

Analyzing Your Budget

You need to look at your budget when it comes to new equipment. Looking at your cash flow, what size monthly payment can you afford. Some additional issues to think about:

  • Is your cash flow seasonal? (your payments may be able to be structured)
  • Is this a one-off purchase, or a series of purchases over time?
  • What added revenue or profit will the new equipment produce?
    • Does the new equipment allow you to bid on larger jobs, or finish them more quickly to increase revenue?
    • Are maintenance costs reduced compared to the old equipment?
    • Can you improve productivity, allowing you to let go of employees?

Choosing Your Leasing Company

You have several choices to choose when picking a leasing company: bank, a leasing company, or an equipment manufacturer/distributor (also called “captive” lessor).

Bank financing is usually the most expensive; however, it may be easier as you already have a relationship with them.

The leasing company offers the most flexible terms, and is the best bet if you’ll need a large volume of leased equipment over time. A leasing company has consulting services for asset management, and can help you construct a long term leasing strategy.

The least expensive financing is captive lessors, however, give fewer choices as they’ll only finance the brands they represent.

Don’t Forget the Taxman

There are two kinds of leases in Canada: operating lease and capital lease.

Operating Lease

In an operating lease, there is no asset controlled by you as you only have the right to use the asset during the lease term. Therefore, the asset is not considered yours, and will not show up as an asset on your balance sheet; only the lease payments will show up as an expense on the income statement.

Capital Lease

In a capital lease, you are deemed to have the benefits and liabilities of ownership for the lease term. This is based on the length of the lease, total lease payments required, and the buyout amount at the end. The asset will show up on your balance sheet; however, for tax purposes there is no deprecation. You can deduct the full cost of the lease payments, interest and principal.

Settling the Lease Documents

Since commercial leases are never written in plain English, like a consumer car lease, you are best to hire a lawyer to review them. Do this even if the leasing company says they’re just standard forms, or not negotiable. Commercial leases are not subject to consumer protection laws.

Certain sections that you should be paying attention to include:

  • Early termination penalties
  • Who pays for delivery, and can you return defective equipment?
  • Are payments before the lease used as collateral, then credited at the end?
  • What’s the buyout process at the end? Does the lease automatically renew?
  • At the end of term, how is equipment returned? Who pays for storage and delivery? What does ordinary wear and tear mean?
  • Will sales tax apply? Who Pays? Which sales tax rate is used?
  • Can the leasing company assign your lease?
  • What happens if you default? What are the leasing company’s remedies?

Your lawyer can also determine whether you can lease under your current bank loan financing, and if you need to get the bank’s consent for the lease

Checking into your financing options, and assessing the value of leasing over purchasing will pay off in the end. What’s best for your bottom line is getting that upgrade or adding new equipment so you can grow.

Seven Reasons Why Small Businesses Fail In Their First Year

By Randall Orser | Budget , Business Income Taxes , Small Business

Studies indicate that as many as eighty per cent of new businesses fail in their first year. The dream of self-employment turns into a nightmare for a surprising number of people. Understanding the reasons so many businesses fail can help you to avoid the pitfalls and prevent it happening to you.

There are many different reasons why people choose to start a business. Some are driven by the idea of turning a passion into a way of making a living. Others are forced into self-employment by a lack of job opportunities. Whatever the reason, the early months are a critical time. If you can survive these and build the foundations, your business has a strong chance of being around for years to come.

The following reasons explain the high statistics relating to new business failures.

1) Lack of planning.

Written plans with financial projections are great tools for keeping a new business on track. A plan should describe the products and services the business will offer and list milestones for the first year. Without a plan, you have nothing to measure performance against.

2) Lack of cash.

Without cash, even the most talented entrepreneur will fail. A new business will initially need cash for stock, materials and working capital. If customers don’t pay on time, there won’t be funds available to continue trading. Lack of cash is one of the main reasons businesses fail, and it’s one that’s easily avoided if you manage cashflow from day one.

3) No marketing activity.

A business won’t survive without customers. Marketing activity is essential to retain existing customers and to reach new ones. You can launch a business with promises of orders from people you already know, but this isn’t a long term strategy for growth. Having a website, engaging on social media and encouraging word of mouth advertising are simple marketing tactics for building a customer base.

4) Poor management.

Entrepreneurs aren’t always the best people for managing the detail of a business. As well as managing the financial aspects, a new business owner needs to build structure and processes. As a company grows, there may be people to manage and staff issues to deal with.

5) Reliance on one or two customers.

Building a business relying orders from one or two large customers can be very risky. Loyalty isn’t guaranteed, and a customer’s financial position could change. The constant threat of competitors stealing these key sources of income places great stress on a business.

6) Poor administration.

Administration is another weakness for many entrepreneurs. If order books, customer records and accounts aren’t kept in good order, you could end up with customer complaints and lost sales. In extreme cases, you could face legal action for failing to pay tax or comply with legal requirements.

7) Not understanding customer needs.

An entrepreneur needs passion and confidence to succeed, but he also has to understand what customers need. Creating a product that no one will buy is a path to ruin. Ideas should always be tested before you commit to build a company around them. It’s also important to recognize whether something is a short term trend or the basis of a long term business.

Launching a business can be a way to follow your passion in life and become financially independent. With no boss to report to, it can also mean flexible working hours and an improved lifestyle. However, a disciplined approach and a range of skills are required to get a new business through the challenges of the early months.

Important Tips for Keeping Proper Business Tax Records for CRA

By Randall Orser | Business Income Taxes , Consulting , Freelancing , Home Based Business

Often times during a small business start-up, the last thing thought about or taken care of is dealing with taxes. This is a huge mistake that must be avoided at all costs. Thinking about the various types of taxes that have to be dealt with when starting a new business should be a priority. In order to keep Canada Revenue Agency (CRA) and other taxing agencies happy proper record keeping is a must. Proper planning in the beginning stages of a new business will make doing taxes much easier when the time comes.

Here are a few simple tips to assist in keeping proper and adequate records.

Any time a purchase is made, it is critical that the receipt is kept and filed in a safe place like a locking file cabinet or at a minimum a file box. If ever audited by CRA, it is essential that all receipts are made available, as they will most certainly request receipts to verify specific purchases. Proof of expenses must be provided to CRA or they will disallow them as an expense and add that amount back into the income category.

Another area that tends to suffer in the small business community, is not keeping business financial books current. Falling behind with bookkeeping is not only frustrating but takes much more time to sort out when trying to catch up. To remedy this, write down all income and expenses as they happen, preferably on at least a daily basis. Organization is an integral part of successful business ownership, and organized books are not only essential in keeping CRA happy, but in helping track the performance of a business.

More and more the government, including CRA, is accepting electronic records. Let’s face it, most receipts are printed on thermal paper now, which degrades over time or even be destroyed. Scanning your receipts and keeping the original with the scan is a great way to ensure you always have your records.

Regardless of the type of tax that may need to be paid (income tax, payroll tax, state tax, etc.), it is critical that the filing of the proper forms is done on a timely basis. Late filing and late payment of taxes will result in paying hefty penalties and interest on the balance owed to the various taxing agencies.

Audits by CRA or other taxing agencies do not have to be feared, as long as the proper documentation is in order. Again, the more organized the records are, the easier it will be to prove and make a case to improve the businesses position. Statistically small businesses and small business owners are audited more often by CRA.

In closing, any existing small business or brand new start-up can see that proper record keeping should be a priority. The hiring of a professional bookkeeper and/or accountant to assist in setting up and maintaining the books is a highly beneficial option that should be seriously considered.

Year-End Tax Tips for Small Business Owners

By Randall Orser | Business Income Taxes , Consulting , Freelancing , Home Based Business , Small Business

Many small businesses, especially single proprietorships, have scaled-down accounting operations. If you’re one of those small business owners who work on simplified accounting, you should still make it a point to work on your taxes before the year ends. While everybody files income taxes in April, do remember that those taxes are for the income earned during the prior year. Hence, you should take advantage of the time until the end of the year to work on your income and expense accounts so you could cut down your business taxes come April. This should also provide you with the opportunity to plan your financial strategies for the next year.

Great Tax Tips for the Small Business Owners

While you may be excited about the upcoming holiday celebrations, do remember that you still have a few things to do for your business. Take a look at the following  year-end tax tips:

Review the financial standing of your business.

There is no problem if you are handling the financial aspects of your business by yourself; many other small scale business owners do because they cannot afford an accountant’s salary. Just remember to take a close eye at your year-end profits because that will be the basis for your taxes. If you wish to pay lower taxes, then you have to show a smaller profit. You can do this by drawing as much as you can as your December paycheck. And before the year ends, make sure that you reduce the total amount you are depositing to your business account. Then, try to issue as many checks as you can to pay for all your business-related expenses.

See to it that all bills due in December are paid early.

Go over our bills one by one, and  pay them all – rent, utilities, insurance, health care, as well as the Christmas bonuses you promised your employees. You should be able to increase your deductions and end up with lower taxes.

Now is the time to buy your office supplies and equipment.

One smart move is to replenish and perhaps even add to your office supplies before the year ends. Remember, your strategy to decrease taxes is by building up your expenses. The purchase of office supplies should do the trick for you. If you had earlier planned on buying some expensive office equipment like a new computer system, or renovating your office and buying new desks and chairs, you may want to execute your  plans before the new year rolls in. However, make sure that your planned expenditures can be supported by your current cash flow. Moreover, everything that you purchase should be delivered, installed and in use before the end of the year.

Income deferment

If you are using the cash-based accounting method, you can delay the invoicing to your customers and collections from your sales until January of next year. This will effectively reduce the revenues booked for the current year that are taxable this coming April.

Some More Year-End Tax Tips

And if you don’t have one yet, you may want to arrange for your individual retirement plan. Not only will this help you prepare for your future, it can also provide you with  tax shelter benefits. Still, you should realize that if you are running a home-based business, you are entitled to deduct portions of your home expenditures from your business taxes. Authorized deductibles include a share of the rent or mortgage payment, utilities, and other home maintenance expenses.

These year-end tax tips should be able to help you prepare for the unavoidable tax season. With that out of the way, you can truly enjoy the holidays with friends and families.

How To Survive An Audit

By Randall Orser | Business Income Taxes , Personal Income Tax

Old fashioned audit report written in feather on parchment. TNBusinesses do not only have to audit financial records these days. You can audit every facet of the business and the processes used by employees for a variety of reasons. Whatever the reason, an external party coming in to audit your business can be quite a nerve-racking experience for the business manager.

Many businesses need to comply with industry specific legislation and audits are one way of tracking that compliance. You may need to demonstrate compliance with security, occupational health and safety, or union regulations. Prospective customers and current customers can initiate audits to see if your business meets their needs.

Auditors will have certain criteria or benchmarks for your company to meet, and will compare your business standards to these criteria. If your business does not meet the criteria, the auditor will issue a non-conformance notice and will give your business a deadline to fix the problem.

Non-conformance in some audits can lead to a loss of licence, legal fines, or legal action taken against the company, and loss of customers. You could even find that your business has to shut down due to non-conformances in an audit, depending on the severity of the non-conformance, and the importance of the audit.

Preparation is the Key to Surviving the Audit

Spending time preparing for the audit before the external auditor arrives will save much time and headaches during the audit. Know what the perimeters and scope of the audit are. Although auditors may not provide the criteria unless asked, all auditors have specific criteria or benchmarks against which to audit the business.

If the audit is required to demonstrate legal compliance, the guidelines for the audit should be available from the government department undertaking the audit. Check each area in the audit and make sure your business is compliant before the auditor arrives. Get out the appropriate files and reports to have on hand to show the auditor your compliance when needed.

Internal Audits Help You to Keep Track

If you have an external compliance audit every two years, you should hold smaller audits in between yourself. These internal audits will enable you to pick up errors and to fix the procedures to match the external compliance requirements well before the external auditor arrives.

You can reduce preparation time prior to the audit by completing small audits internally, as part normal procedure. Audits, whether internal or external, give you the opportunity to see whether your business procedures are efficient, helpful, compliant, and if staff are following procedures correctly.

Review Procedures against the Benchmarks to Ensure Compliance

Review your current business procedures against the legal and external benchmarks or standards expected. Make sure that if your employees are following your procedures, you will automatically be compliant with the audit requirements.

Discipline Employees for Not Complying with Procedure

If your internal audits or other checks show that certain employees do not comply with the procedure, you may need to instigate further training and even disciplinary action, as required. Enforce your business procedures, so that employees are used to complying with the requirements and you will not worry that individuals will let your business down during the external audit.

Say as Little as Possible During the Audit

A common error made by business managers is actually telling the auditor too much. Allow the auditor to ask the questions. Answer the questions concisely and do not be tempted to add in extra information. Any additional information may lead the auditor on to a different track, and could show unexpected errors.

Negotiate for Time to Fix Identified Issues

When the auditor does bring an issue to your attention during the audit, you can negotiate for time to fix the problem before the auditor gives your business a formal non-conformance notice. This could save your business from paying fines or dealing with some of costs involved with a formal non-compliance. If you can address the issue within a couple of days, many auditors will hold the audit report open for you if you successfully negotiate and show the auditor a willingness to resolve the non compliance issue.

Respond Quickly to Identified Non-Conformance Issues

As soon as practical after the audit, send a report reply to the auditor with the necessary attached documents which prove your business is now compliant. This allows the auditor to close out the non-conformances and could prevent the auditor returning to check if your business has resolved the identified problems.

Preparing your business to survive an essential or legal compliance audit is not difficult, but does take some work and planning time. If you have everything in place prior to the auditor arriving on your site, your business is far more likely to survive the audit without any non-conformance issues.

Why Small Businesses Go Bankrupt and How to Avoid It

By Randall Orser | Budget , Business Income Taxes , marketing strategy , Small Business , Technology

Debt Word And 3d Character Shows Bankruptcy And Poverty TNStatistics are regularly released that say something to this effect: “85% of new businesses fail in the first five years”. The message is clear. If you start a small business there is a high probability that you will fail. You would think that this would send the smart money straight to the Help Wanted ads but what about the businesses that succeed? What made them different? What secret did they know that lead them down the path to prosperity? Here is what you need to know to be one of the winners.

Lets look at a scenario. Andre is a baker. Not just any baker. When anyone who has eaten Andre’s baking hears mention of it they start to salivate like Pavlov’s dogs. One day Andre’s grandmother passes away and leaves him a modest inheritance. His time has come. He takes his money and starts his dream business. Five years later the inheritance is gone and Andre is back working for his old boss. What happened?

Andre had spent all his time learning about his passion, which was baking. In order to succeed he needed to know an equal or greater amount about business. For every cookbook he read he needed to read a book on business. For every cooking class he attended he needed to attend a course on business. Andre didn’t know the difference between a Monthly Bank Statement and a Cash Flow Forecast. He had heaps of Specialty Knowledge and almost no Business Knowledge.

So the first step to succeeding in business is to learn about business. Sounds simple doesn’t it. It is but it is a sad fact that most people will only figure this out after it is too late and maybe not even then. Here are some things you can do to give yourself a huge edge and increase your likelihood of success.

  • Sign up for some courses in small business at your local college or university. Maybe even start working on a degree in business. Be aware that there are now programs aimed at learning to be an Entrepreneur, which differ somewhat from a typical business degree designed to send you into the corporate world.
  • Start networking. Meet successful business people. You will find them at your local Chamber of Commerce, at work in their business and as members of clubs such as Toastmasters.
  • Read books on business. The libraries and bookstores are filled with them. Read reviews to find some of the most recommended titles and take notes when you read them.
  • Make use of the excellent resources online. The United States Small Business Administration website is just one example of a tremendous (and free) resource on starting a small business.

Entrepreneurs are known for taking risks but the reality is that the skilled entrepreneur takes risks that are calculated and based on knowledge and experience, which is available to anyone who will go looking for it.

One west coast entrepreneur has owned a jewelry store, a pub, a community centre, a restaurant and a music store. Each one was a success and was ultimately sold as a profitable business. The key elements of his success were his solid business fundamentals.

Some things you need to know before you start leasing space, hiring staff or buying equipment include:

  • A sound understanding of Business Plans and which one you need (and you absolutely do need one).
  • The basics of marketing, who your customers are and how to reach them with your message.
  • What is your USP (Unique Selling Proposition) and how this differentiates you from your competition. Why would your potential customers choose you over them?
  • What are the important numbers that you need to know and monitor to measure the health of your venture.
  • What is Cash Flow, how does it differ from Monthly Sales, what potential Cash Flow pitfalls effect your business model and how can you protect against them.
  • Who are your competition and what are their strengths and weaknesses.

Taking the time to gain a solid business education to supplement your Specialty Knowledge is the key to surviving your new business venture. It is what separates the winners from the losers. Reading this article is a sign that you are on the right track. Use the list given above as a starting point as you build a framework of required business knowledge and continue to fill your areas of weakness until you are strong and prepared to enter the arena. Do this and you will enhance your potential for success and give yourself the edge you need to achieve your dreams.

tax

What Records do I Have to Keep for my Business?

By Randall Orser | Business Income Taxes

As a business owner, there are certain records that you need to keep. The obvious being your receipts for expenses you incur and your invoices for your sales. There are other records that you may not realize that you have to keep, such as employee information and payroll documents, contracts, leases, and more.

Income and Expenses

You must keep all your invoices you’ve sent to clients, and even those that you voided. It is best if your invoices are consecutively numbered (1,2,3, etc.). You can keep these electronically or through your accounting software. If you’re going to keep a paper file, sort them by invoice number, and make sure there are no gaps between numbers.

For expenses, keep all receipts for your debit, credit card, cheque, and cash purchases. That means keeping all your telephone bills, cell bills, vendor purchases, meals, advertising, etc. Make sure that for every entry into your accounting system, or showing up on your tax return, there is a matching receipt. Most audits crash and burn because the receipts are not there. You can keep receipts in what CRA calls ‘electronic imaging format’, which basically means a scanned document.

Government Remittances

You must keep all of your government remittance forms you’ve filed including: payroll remittances, GST/HST returns, provincial sales tax returns, workers’ compensation, and any other government agency remittances you need to make. Plus you must keep all documents that support your remittance and any calculations you did to come up with your remittance amount.

Format

You keep records in the format in which you received them whether paper or electronic, plus scanned documents (though at the moment it’s best to keep the paper copies). If you’re using accounting software you must keep a backup for each fiscal year in a safe and secure location (safety deposit box or online is best). For online accounting software, you should do a backup, usually to a spreadsheet, each fiscal year or a printout (paper or PDF). If you’re using a spreadsheet, you should have one for each year and also kept safe and secure. If you’re using a manual system, then we need to talk.

You must also keep all records in Canada unless granted permission to do otherwise by CRA. And, you must make all records available to CRA upon request. Note that CRA can take a backup of your accounting software and run it through their system; from my understanding of the system they use this to flag items they want to look at.

Other Documents

There is other documents that you need to keep that relate to your business and most will relate to your expenses you’ve incurred, some can relate to your sales too.

Payroll documents are the first thing that comes to mind. You must keep employee information (SIN, address, wage rate, etc.), TD1s filled out, employment agreements, ROEs, and paystubs (these will show the hours worked and deductions taken). The best way to keep this information is in a folder per employee; can also be electronic.

Contracts for leased equipment, vehicles, property (your office outside the home), and service contracts for consulting, marketing, etc. Make sure you keep copies, as most of these contracts will state the total value of the contract, the monthly payments, and the sales taxes.

If you have sales agreements, or other agreements/contracts, with your clients, make sure you keep copies, especially for those sales that are a monthly recurring amount.

As you can see, there are many records that you have to keep, for that just in case time that CRA, or some other government agency, comes calling and wants to check over your records.

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