Business -> Business
expenses
What expenses can I write off against my business income?
In general, expenses incurred in order to earn business
or property income are tax
deductible. Many of your expenditures will be fully deductible in the year in which
they are made. There are exceptions and limitations.
Capital
costs, or fixed assets, such as land,
buildings, vehicles, machinery and equipment, computers, etc. are not fully deductible in the year
they are purchased. These
items will be recorded on your balance sheet as assets. For accounting
and tax purposes, you will write off a portion of their cost (except for land) each
year. This is called depreciation
or amortization for accounting purposes,
or capital
cost allowance for tax purposes. The Income Tax Act specifies what rate can be used to write
off the fixed assets as capital
cost allowance, and will often differ from the depreciation recorded on
your financial statements. Land can never be written off as an expense
unless you are in the business of buying and selling land.
Capital cost allowance rates
were increased for computer equipment (from 45% to 55%) and for certain other
assets
purchased after March 18, 2007. Ask your tax advisor
how this applies to your purchases, and how separate classes
for rapidly depreciating electronic equipment can help you.
Inventory will be
written off against income when the goods are sold. Until that time, the
costs are recorded on your balance
sheet as inventory.
Prepaid
expenses will only be partly deducted in the year paid. The portion related to a future
fiscal
year will be expensed in that year, and recorded on the balance sheet as
prepaid expenses until then.
Accruals
should be done at the end of the fiscal period to record costs which have been incurred but not paid. This
ensures that your costs are recorded for tax purposes, and that you claim your
GST/HST input tax credits at the earliest possible date.
The above information regarding prepaid expenses and accruals describes
record keeping when the accrual basis of
accounting is used. Those people who are in a farming or fishing
business, or who are self-employed commission sales agents, are allowed by the Income Tax Act to use the cash
basis of accounting, and record all revenues and expenses when the payment
is received or paid.
Your income statement
and other financial statements
should be prepared according to "Generally Accepted Accounting Principles",
or GAAP. In order to accomplish this, you need to keep receipts and detailed
information about your expenditures, so they can be properly classified by you
or your accountant.
For more information on business expenses see the Canada
Revenue Agency (CRA) T4002 Business and Professional
Income Guide Chapter
3 - expenses.
See also: What meal and entertainment costs can I deduct?
Revised: December 01, 2009
