Tax Write-Off Red Flags to Avoid for Small Business Owners

By Randall Orser | Personal Income Tax

BudgetOne of the distinct upsides of owning a small business is the ability to write off various expenses. Good accountants can get creative while still staying within the bounds of the increasingly complex tax code. The truth, though, is that small business owners are often ill-equipped to deal with the challenges of an audit or other Canada Revenue Agency (CRA) investigation. Unlike large companies that have huge tax and legal departments, small business owners are often paying out of pocket for assistance when things go wrong. With this in mind, avoiding problems is as big a priority as saving money. Here are some tax write-off red flags to avoid if you want to stay solvent as a small business owner.

Be wary of the home office deduction

If you do work from home, then you might be tempted to take a home office deduction. This means deducting some of your Internet and phone expenses, too. There are distinct rules on what counts as a home office, though. If you’re just working out of your bedroom, you’ll have a harder time justifying a home office write-off. More importantly, home offices can trigger an audit, raising harmful red flags with CRA. Ensure that your home office is legitimate if you’re going to try to earn savings in this way.

Small business “Schedule T2125”

If you’re filing as a small business owner, you might find that Schedule T2125 offers the opportunity to take ample deductions. While this is a place you might save money, it’s also where CRA agents spent the bulk of their time. Taking excessive deductions on Schedule T2125 in relation to your income can trigger a CRA audit. More and more these days, CRA is spending time on small business owners. Be careful with how you treat your Schedule T2125 deductions and activity.

Issues with charitable donations

Giving to charity can make you feel warm inside, and it can benefit your business or brand. Be prepared when you decide to make donations, though. If you claim too many charitable donations, you can be subject to audit. CRA understands how much money people donate at a given income level, so massive amounts of giving can cause agents to ask questions. More important is getting appraisals for the non-cash donations you make. These property donations are a hotbed for tax fraud, so having no appraisals for the value of your donations can make you a hot target for CRA investigation.

Large deductions of meals and travel

Small businesses do have legitimate costs that can be deducted. CRA understands, though, that many small business owners will look to skirt the rules by writing off personal dinners and travel. Keep these expenses in check if you’re looking to avoid an audit. If you start writing off vacations by claiming that they were for a business purpose, you may find a CRA agent knocking on your door. Smart small business owners will err on the side of caution in reference to these costs, understanding that the risk of an audit outweigh the benefits of the write-off.

Small business owners must be smart in their tax preparation. With more people than ever going out on their own, CRA is now geared up to investigate people who play around with the tax code. An audit can be a headache and a financial nightmare. Taking these tips into account can save money over the long run. I believe that CRA truly hates self-employed people, and wants everyone to be an employee.

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