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Business Tax Myths You Should Ignore

Tax regulations often fall to the bottom of small business owners’ priority list as they get busy with managing their companies and employees as well as working on product development.

Though it is crucial for entrepreneurs to focus on all aspects of a business to grow and succeed, failing to manage their taxes can cause detrimental consequences. They can face fines, interest costs, late fees, and even get audited by the Canada Revenue Agency (CRA).

It is often understandable that many small business owners face challenges in managing their taxes. Taxation is already complicated– and it does not help that there are many myths and confusion about it. The world of taxes is filled with misinformation about tax loopholes, deductions, and write-offs, and much of which easily spread among entrepreneurs. Blindly following these tax misconceptions could get them in hot water.

Here are some of the most common tax myths that you should ignore to protect yourself from getting audited and facing costly penalties:

MYTH: Tax filing is voluntary.

FACT: Voluntary compliance is the foundation of Canada’s self-assessment taxation system. It simply means that the government expects Canadian citizens and business owners to respect the law and comply fully with their tax obligations.

However, the taxation system’s voluntary compliance approach does not imply that the law cannot be enforced when necessary. Laws, including the Income Tax Act, provide a range of penalties for offences, such as tax evasion, failure to disclose income, failure to pay taxes, or refusal to file a tax return. Individuals or business owners can get penalized for their offences through fines, third-party claims, seizures, and criminal prosecution.

MYTH: All start-up expenses should be deducted immediately.

FACT: Business owners do not necessarily have to write-off their start-up expenses immediately when filing their taxes. They can choose to deduct or amortize their start-up costs.

Start-up costs refer to expenses incurred before a business begins its operation. These costs often include both start-up and organizational costs and vary depending on the type of business.

Though they can deduct expenditure that preceded business operation in full in the current year of taxes, entrepreneurs can choose to deduct or amortize costs for equipment or machinery purchases they made to start their enterprise.

Business Tax Myths

MYTH: Home office deductions increase the risk of an audit

FACT: While small business owners can deduct expenses for the business use-of-a-workspace in their homes, it does not mean that they can write-off all the expenses for their homes. Excessive claims related to home office deductions may lead a business to get audited.

If small business owners end up being audited, their home expense claims may be disallowed for the current and even in the years prior, leading to a high tax bill.

Home office deductions can include expenses for utilities, home insurance, maintenance, rent/mortgage, and property taxes. It would be best to remember that some of the home expense deductions must be proportionate to the actual space they use in their home for their business.

MYTH: Overpaying taxes will help a business avoid auditing

FACT: Businesses get audited when they underpay their taxes. But, it would not matter whether a business pays the right amount or if they overpay. If a business pays more than the amount needed for the year, it will likely get a tax return when the tax time rolls around.

The best way for business owners to avoid auditing is to pay the exact amount of tax that they owe, mainly based on their business calculations for the year.

MYTH: It is good to get a big tax refund.

FACT: Though many small business owners look forward to receiving tax refunds, getting a large refund means they have overpaid on their taxes. Accordingly, it could also be a sign of poor tax planning.

Overpaying taxes means a business is sending money that is not needed or money that could have been used for business purchases or other things that can help their enterprise grow. Moreover, businesses are also essentially giving the government a free loan with their excessive tax payment.

MYTH: Filing taxes by mail lessens the chances of getting audited.

FACT: No evidence suggests filing taxes by mail helps business owners avoid auditing.

Individuals and businesses can mail their tax returns to their respective tax centres or choose to file their income tax and benefit electronically. Canadian residents can file their tax returns using NETFILE, EFILE, or CRA’s Auto-fill service.

Tax Myths You Should Ignore

MYTH: The CRA conducts “e-audits” using email. 

FACT: The CRA does not use email to notify taxpayers about pending audits. It also does not conduct “e-audits.”

According to the CRA, “e-audits” sent via email is a scam going on in the US, and there are no confirmed cases of such type of scam in Canada. The scam works this way: a taxpayer will receive an email using “Canada Revenue Agency e-audit” as the subject line. The recipient/taxpayer is instructed to fill out a questionnaire in the email, which primarily requires them to provide their social insurance number, bank account numbers, and other confidential information.

The CRA is committed to protecting the confidentiality of all taxpayers’ information. It does not use the internet to communicate with taxpayers unless the latter has provided permission. Thus, business owners should never respond to an email that appears to be sent by the CRA.

Conclusion

To minimize the risk of getting caught in these business tax myths, small business owners must file their paperwork based on taxation laws, such as the Income Tax Act, and avoid following someone else’s bad advice.

They also need proper bookkeeping and accounting to ensure correct and up-to-date financial records. Poor record-keeping and accounting practices can cost businesses a lot of money in potential deductions.

While most large business enterprises hire their in-house bookkeepers and accountants, small businesses do not have the luxury to do so. They often do their own record keeping and accounting.

Keeping track of business expenditures and other financial transactions can be a tedious day-to-day task, but it is an administrative task crucial for business growth and regulatory compliance. Small business owners can efficiently record, track, and categorize business expenses and analyze their business growth status using online accounting and bookkeeping services.

Furthermore, leveraging free accounting software for small business can help entrepreneurs properly and accurately planning their taxes. Having correct and up-to-date financial and accounting records can make the tax filing procedure easier and also avoid closer scrutiny by the CRA.

Where to get easy-to-use and time-saving bookkeeping and accounting services?

KIPPIN is a cloud-based mobile bookkeeping service that aims to make people’s lives easier. We provide accounting, bookkeeping, payroll, and tax services – all on a cloud platform.

Contact us today at 1-905-581-9362 or [email protected] You may also visit our website at www.kippinitsimple.com to learn more about our products and services.

 

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