I’m often asked, what expenses can a business claim? There are the obvious ones of course. A list of the standard categories to add up can be found at here, but what are the not so obvious transactions that a business needs to track? What expenses can a business claim?
A core message you hear from me is: We are tracking our totals mainly for our own benefit, to make sure we are achieving the profit and growth we are aiming for. To this end, we want to make sure to capture all transactions that that would not have happened if we were not running the business. We want to get as close to reality as possible. In order to do so, we must keep our personal purchases separate from those that are business related.
Special Hack for the Grey Situations: "Would I Reimburse An Employee For That?"
A really good guide for know what is business and what is personal is to think, ‘’Would I reimburse my employee for that?”. For example, if you asked them to pick up donuts for the entire office because of an office meeting, would you expect them to pay for all the donuts? No, you would have no issues with giving them the money to cover it. If they went out at lunch to buy themselves a fast food lunch, and brought back the receipt, would you cover that? Probably not, especially if they did that every day. If you were at a job site that was far enough away from home that you and your crew needed to stay overnight in a hotel, would you cover that for them? Yes. Also, because they could not go home to pack a lunch the next day, you would probably cover their travel meal. Often, construction companies offer compensation for safety rated steel toed boots. In contrast, if one of your sales reps came into your office and said, “I need to have fresh breath for when I do my sales pitch to prospective clients, so I expect you to cover the cost of my toothpaste” you would likely think he was crazy!
Using the “would I reimburse an employee for this” guideline can be extremely helpful in deciding if it is an expense you believe is related to running the business or not. It also helps in considering if it is an expense that the CRA would allow if you are ever audited, because their goal is to find the number that is closest to reality too.
ProTip: If you are claiming a meal expense, write down on the receipt who you met and how it was related to business, so that the info is there if you are audited. And yes, you can include the Tip in the entry. (But know that even business meals expenses are only claimed at 50% for tax purposes). If you are travelling out of town, you can claim travel meal. But if you're in town, and you're not meeting a business related person, then it's not claimable, as per the guideline above, "would I reimburse an employee for this".
Mixed Use Expenses:
These guidelines also can help to understand mixed use expenses that you are allowed to claim. Mixed Use expenses are expenses that support the running of the business that also support the running of your non-business life, such as your car and your home office.
Let’s start with Vehicle Expenses
If you had a company truck that your employees picked up at the shop, and use to go to jobsites or clients, would you expect them to pay for any of the gas or maintenance? No, you would cover those truck expenses 100%. Similarly as a business owner, a company vehicle that is used 100% for business, you can claim 100% of all expenses. But when you start out, you generally have a personal vehicle that you use for both personal errands and business running around, that is used for less than 100% for business.
If your employee used their own vehicle to just drive into the office in the morning, and then back home at the end of the day, would you cover the cost of their gas and vehicle maintenance? No. Driving to and from the main place of work, such as a store or office, is not something you would reimburse for. CRA also does not consider this business use if you're just driving into your own office. If your employee drove around in their own vehicle to sales appointments, they would expect some sort of compensation. Would you cover every single gas receipt they put in their car for the entire year, and 100% of all their maintenance bills? No. How would you feel if they drove 10 minutes to a meeting, and 10 minutes back from a meeting, and filled up their gas tank from empty along the way? Would you reimburse for the full tank of gas? No. In Canada, we generally use “Vehicle allowance” or a “per km rate” to reimburse employees for use of their personal car. Though, for business owners, currently in Canada, it is a bit more complex.
For business owners, CRA would like to get a little closer to reality. That is, the per km rate does not account for higher maintenance costs for certain vehicles, or the variance of gas prices across the country. So, they become more detailed for business owners. (As mentioned above, getting as close to reality as possible).
For business owners, the way that the CRA allows vehicle expenses is by percentage. If you use your vehicle for business, you can claim the percentage of all your expenses that correlate with the percentage of time you use your vehicle for business. To do that, they expect you to keep a vehicle log so that the percentage can be calculated. They are trying to get as close to reality as possible. No more, no less. You can claim that percentage of ALL the vehicle expenses; maintenance, gas, plates, insurance, lease, Capital Cost Allowance (the vehicle losing value over time) or the interest on the loan. (Not the full loan payments. Paying down a loan is not an expense, it is decreasing how much you owe. It is the interest on the loan, that is an expense, and you can claim a percentage of that).
If you have a work vehicle that you ONLY use for business, then the percentage you are claiming is 100%. If you use your vehicle half the time for business, and the other half the time for personal, then you can only claim 50% of your vehicle expenses. If you use your vehicle for both personal and business, you are required to keep a vehicle log, and to note your odometer at the beginning of every year. (There are apps that can help!) If you use your vehicle for 90% or more for business use, then keep a vehicle log for 3 months with the odometer reading from the beginning and the end of the three months, and you can use that as a baseline to show CRA if you are ever reviewed or audited.
The next question is, how do you track all of the vehicles expenses, if you are only claiming a portion, especially if you do not know the percentage until the log is added up at the end of the year?
Many bookkeeping software applications have not yet accounted for this percentage issue, (often referred to as “allocations” or “Personal Use Allocations”). Some have, especially since the rules for the amount you can claim for GST/HST on these expenses follow the same rule. Most have not, even the bigger named bookkeeping software. Many of them work on the assumption that your vehicle is 100% business use.
You have options. To make your bookkeeping easier, if possible, you can try to focus on only one vehicle for business use and use another for personal errands. Otherwise, here are some suggestions:
If you are incorporated, it’s important to discuss how you will be handling your vehicle costs with your accountant at the beginning of the year. Also, before you purchase a vehicle, connect with your accountant to ask whether they think given your specific situation the vehicle should be purchased in your name or the corporation’s name.
Business Use of Home Expenses
Another scenario to consider. Kind of weird, but in keeping with the ‘would you reimburse your employee’ metaphor. If you wanted an office to run your business out of, and one of your employees said they had the perfect room for you at their place, would you expect to be able to work from their home office for free? Probably not. They would likely expect some sort of rent to be paid. Similarly, this is why CRA allows you to include your own home office as an expense. Then how do they calculate this amount?
It is a percentage game again.
There are two categories to consider here. The cost of maintaining your home that you would have to pay anyway if you had a business or not, and those costs that are higher than usual because you are running a business, such as telephone and internet use, and maybe electricity if you have a workshop on your property.
For those costs you would have to pay anyway, first you calculate the percentage your office space takes up in your home. Then, you add up all the costs it takes to run your home; utilities, insurance, maintenance, property taxes, rent or mortgage interest (not the full mortgage payments, just the interest portion). These are not usually paid for out of the business bank account, because they are below 50% business use, and would really mess up your Income Statement totals. We usually total these up at the end of the year (and associated HST), and then add an adjustment in at the end of the year, mainly to decrease your taxable income. For my personal situation, I claim 12.5% of my Business Use of Home expenses (Also known as home office expenses).
The other category to consider are the home mixed expenses that are higher because you are running the business, such as telephone and internet use.
These can be claimed at a higher percentage, and you likely want to see them on your Income Statement, because you want to consider them when evaluating your profit. Consider adding the business portion only into your monthly entries into your bookkeeping, along with associated HST. Still pay the full bill out of your personal account, but mark the business portion of the expense you enter as “Paid by Owner” (or, paid by cash).
Mixed Expenses can be a pain. But, they do help reduce your taxable profit! And in the context of wanting to get as close to reality as possible, how CRA expects them to be claimed, and how you want to see them when evaluating your Income Statement, you can see how it is helpful to know what is expected and how you are going to handle them ahead of time! For example, right now, go outside and write down your odometer reading. Then grab a notebook to keep in the car, or download an app, to keep track of kilometers you drive for business!
In Summary: Start a vehicle log, today.
- You can claim a portion of all your vehicle expenses. The percentage you can claim is related to the percentage you drive your car in the year for business. The vehicle expenses you want to track are:
Notice that I wrote “Vehicle” in every expense there. For clarity, you need to name your Ledger accounts specifically with the word “Vehicle” in it. Do not put all insurance into one GL account. This will cause headaches at year end. Put your Vehicle Insurance into It’s own GL Account, and put your business insurance into it’s own GL Account.
- You can claim a portion of all the expenses it costs you to live in your home. This is a much lower percentage, so it usually is an adjustment added in at the end of the year. The Home Expenses you will need totals for are:
- If you are incorporated, connect with your accountant with how they feel is the best way to claim your mixed use expenses given your specific situation. And if you are incorporated, connect with your accountant before you purchase a vehicle to discuss if the vehicle should be in your name or the corporation’s name. There are tax implications for both!