Sage recently hosted a session at Vancouver Startup Week 2021 called ‘Setting up for financial success’ in which business & software consultant Anna Abbruzzese of Actium Consulting, answered the most frequently asked questions startups have. Here are the highlights.
What is considered business (taxable) income or net business income?
Net business income is your taxable income. In other words, the amount of money earned through your business that you will have to pay tax on. The net number is determined by business income minus business expenses.
It’s safe to assume that almost any money that you receive from a customer for products or services is taxable. It doesn’t matter if you earn it selling B2C or B2B, taxes will be due on net income earned – which is your gross sales or revenue less valid business expenses. If you’re running a business while still working your 9-5, those wages or salaried income won’t be classed as business income.
What expenses can my small business claim?
Always remember the words ‘legitimate’ and ‘reasonable’ before you deduct any business expenses. If you’re unsure, there’s a clear-cut list of expenses provided by the Canada Revenue Agency.
To be considered a reasonable expense, the item must be appropriate to your business and spent in an attempt to earn income… Just in case you were thinking of writing off a family trip to Mexico as a travel expense just because you brainstormed your product pitch on the beach.
Can I expense a new laptop or an electric scooter if I use them as part of my business?
The short answer is no, and that’s because you should think of deductible expenses as items that are consumed and spent within the tax year. ‘Big ticket items’ like vehicles and IT equipment should be classed as assets and their depreciated value should be recorded each year.
Expenses aren’t always equal for every business. Often, I am asked if items like clothing can be expensed. In these cases, you can only expense uniforms or items with a company logo that would not be worn outside of work. For example, a plumber may be able to write off work overalls with the company logo on it, but a yoga teacher can’t deduct yoga pants, as they can be used and worn during non-working time.
How much should you set aside for taxes and other costs?
As a rule of thumb, you should keep at least 30% aside for taxes. This is the new habit startup owners have to learn after years of having their taxes already deducted from their paycheques. If you are a self-employed individual, you will not only owe income taxes, but also CPP premiums on that business income when you file your taxes. It takes discipline, but if you keep good records and hold onto your receipts, you may have a number of eligible deductions that will help you reduce your taxable business income.
Should I incorporate?
I promise, this is my only ‘it depends’ answer today. It will depend on your personal cash flow needs and whether you have other sources of income. Incorporating may allow you to DEFER (not avoid) taxes, however you will now have to file personal and corporate tax returns which is an additional cost. Due to the additional administration and variety of options, it is very important to speak with an accountant to determine what is best for your own personal situation.
How do I pay myself if I’m incorporated?
If you choose to incorporate, you can pay yourself a business salary, or pay yourself with a dividend. It’s also possible to do a combination of both.
Do I have to work with an accountant or bookkeeper, or can I do my own business books?
I would say that every business needs an accountant from day one to assist with year end taxes and planning. That is unless you have a certified accountant within your organization.
Some startups really want to do their own books and we provide training and ongoing coaching to assist. I have a current client who is a hairstylist but loves numbers and making things balance so she wants to do her own books and gets so excited when everything reconciles at month end. If she has an issue, she has us to lean on.
We often recommend reviewing your capacity and what you would like to spend your time on. A professional bookkeeper can be an invaluable resource in your business so you can focus on what you do best while ensuring the business is fully compliant.
What’s the difference between bookkeeping and accounting?
Bookkeeping is a direct record of all purchases and sales that your business conducts, while accounting is a subjective look at what that data means for your business. An accountant can be considered a bookkeeper, but a bookkeeper cannot be an accountant without proper certification.
Finally, what is the most important advice you would give someone setting up their own business?
- Start your business while you’re still employed.
- Don’t do it alone.
- Develop a business plan & a budget.
- Ensure your finances and capital required are in order.
- Network and get clients or customers first.
- Research your industry, product and services.
- Get professional help.
- Be professional from the get-go.
- Get the legal and tax issues right the first time.
If you’re a startup owner getting ready to do your business books for the first time Download Your Free Quick Start Guide to Bookkeeping.
This article is part 1 in the series Startup Success. You can read part 2 here: An Entrepreneur’s Answers to Your Startup Finance Questions