Among the responsibilities of being a small business owner is filing their annual business income tax. Although, it can be an overwhelming endeavor for some, especially worries surrounding filing mistakes and overdue deadlines.
Therefore, necessary preparations should be done all year-round to ensure the correct paperwork is submitted accurately and on time. To get your Canadian small business ready for tax season, here are some tips to consider.
Remember Important Dates
Besides avoiding missed deadlines, knowing the tax season calendar also helps entrepreneurs determine when to start making payments and submit tax returns. It also enables them to check if the due date falls on a weekend or a Canada Revenue Agency (CRA)-recognized holiday. In such cases, they will be given until the next business day to follow through with the submission.
Also, remember that the filing deadline and the payment deadline are not the same. Tax payments must be settled by their specified due date.
Determine the Type of Tax Return to File
The type of tax return to be accomplished and submitted for your small business depends on its legal structure.
For self-employed individuals or operators of a sole proprietorship or partnership, your income coming from the business is reported on a Personal Tax Return (T1 Form). In contrast, the income of the business itself is declared on Form T2125 or the Statement of Business or Professional Activities.
For incorporated businesses, the business income is reported on a Corporate Income Tax Return (T2 Form). Since your incorporated small business is recognized as a separate entity, it is required to file its own tax. Likewise, as a separate legal entity yourself, you must also submit your own Personal Tax Return.
Decide How You Will Prepare Your Tax Return
After establishing the type of return you need to file, you must decide who will and how to accomplish it.
There are multiple ways to prepare your tax return. You may opt to do it by yourself manually or with the help of technology or hire someone else to do it for you.
- Manual Tax Return Preparation
This process is identified as the traditional way of filing taxes, which involves filling out and submitting physical documents to the agency. These paper forms may also be sent via mail.
While paper returns are still possible, they are often uncommon since more prefer using technology to perform the task. Furthermore, current and previous tax forms are available on the CRA website.
- Tax Preparation Through Software
Using an installed program or an online app has become a preferred option to numerous small business owners as it gives them ease and convenience of filing their taxes electronically. Some software is free to download on most mobile devices, while others require purchase. Still, be sure to check if your software supports filing in your province because some do not.
- Hiring a Professional to Prepare Your Tax Return
A professional tax preparer or an accountant not only provides you expert services and advice but can also help you maximize applicable deductions, including claiming tax preparation costs as an expense.
When choosing a tax professional to work with, candidates must be screened thoroughly to ensure you only hire qualified individuals who can process your return on time. If you already have an in-house accountant or outsourced staff, it can help expedite the process, mainly because they have been working on your financial records throughout the year.
Organize Necessary Documents
Canadian small businesses should have an organized filing system to streamline processes and ensure that nothing is overlooked when tax season arrives. Subsequently, these documents can help determine eligibility for deductions.
Ideally, entrepreneurs should keep their receipts, financial records, and other relevant documents organized in a way that makes data retrieval hassle-free. For example, they can leverage small business accounting software to eliminate the risks of paper records and expedite operations. It is also advisable to seek the counsel of a qualified accountant.
Understand and Maximize the Deductions You are Eligible for
Deductions can bring down your tax liability by reducing your total taxable income. Hence, you must track your expenses year-round to determine which ones qualify as legitimate Canadian income tax deductions.
You may refer to the CRA website or consult with your accountant about the matter. These expenses may include home-based business expenses, capital cost allowance, registered retirement savings plans, scientific research and experimental development, and employee gifts.
Set Aside Your Budget Prior to Tax Season
Segregating your funds is a crucial part of owning a business. You should have enough funds to cover necessary expenses like taxes. With a good budget plan, you can ensure to pay tax bills on time.
Tax season should not be a hassle for Canadian entrepreneurs. By making the necessary preparations throughout the year, remembering important dates, knowing the right requirements, and consulting with tax experts, tax filing can be smoother for your small business.
Moreover, with the help of reputable accounting and bookkeeping services, you can ensure that financial records are well organized to expedite the process. Monitoring your expenses enables you to qualify for and maximize income tax deductions.
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