6 Year-End Small Business Tax Savings Tips
Year End Tax Saving Tips to Reduce This Year's Canadian Income Tax
As the fiscal and tax year draws to a close, it’s important to review your business tax situation to see what you can do yet to minimize the income tax you’ll have to pay. Use these six year end small business tax saving tips to implement tax-saving strategies before the New Year.
1) Maximize your Capital Cost Allowance (CCA) claim.
Purchase necessary equipment and technology now rather than waiting for the new tax year to start.
Although you’ll only be able to claim 50 percent of the normally allowable Capital Cost Allowance on most classes of new assets (referred to as the half-year rule), you’ll still be increasing your Capital Cost Allowance for this tax year – and setting yourself up for an increased CCA claim in the following tax year. For more on maximizing your Capital Cost Allowance claim, see 8 Tax Strategies to Maximize Your Business Income Tax Deductions.
(And you'll want to bookmark this page so you can find it easily when you're ready to figure out your Capital Cost Allowance claim: How to Calculate Capital Cost Allowance.)
2) Delay disposing of depreciable assets.
If you’re planning to dispose of depreciable assets, such as manufacturing equipment or computer equipment, don’t dispose of them until the new year. Otherwise, you’ll be reducing your Capital Cost Allowance Claim for this tax year.
3) Delay or defer income.
Any income your business receives in January rather than December will reduce your business income for this year – thereby reducing the tax on your income.
Delaying or deferring income makes especially sound tax sense when your business income is higher than usual, or when the tax rates in the coming year are going to be lower.
4) Increase business expenses.
Another way of “managing” your income for the year is to increase your business expenses. Think about your upcoming needs for products or services and fill them now.
Review the categories of potential business expenses, and see if your expenses are “low” in any one area. It’s certainly never too late, for instance, to do some more advertising or promotion for your business. (See these 19 Advertising Ideas for Small Businesses, for instance.)
5) Make your maximum RRSP or TFSA contributions.
If your business is set up as a sole proprietorship or partnership and is making a solid income RRSPs (Registered Retirement Saving Plans) are an excellent way to reduce your taxes and save for your retirement. In any given year, you can contribute up to 18 percent of your earned income, and your RRSP contribution is deducted directly from your income. The higher your tax bracket the greater the deduction.
If you don’t have an RRSP, there’s no time like the present to set one up. For more on the RRSP as a tax deduction, see RRSPs: The Best Income Tax Deduction for Small Businesses.
For those in lower income brackets a tax free savings account (TFSA) might be preferable to an RRSP. TFSA contributions are not tax deductible but any earned income in a TFSA is tax-free. Up to $5,500 per year can be contributed to a TFSA (as of January 2016) and unused contributions can be carried forward to future years.
Amounts can be withdrawn from a TFSA at any time for any purpose, providing a greater degree of flexibility than RRSP contributions.
6) Maintain your calendar year reserve.
Thinking of winding down your business operations? Rather than closing down your business before the end of this year, wait until next year, so the remaining portion of your calendar year won’t be taxed until the following year. That’s right; staying in operation for a few more weeks will defer this income inclusion for a year.
It Just Makes Sense
We can't avoid taxes, but it's wise business practice to minimize the income tax payable. Putting these six tax savings tips into effect during the waning weeks of the tax year will help you reduce your income taxes and get a jump on next year's tax planning.