Business and Professional Income

In the realm of tax and accounting, understanding the intricacies of reporting business and professional income on your personal tax return is paramount. This task, while complex, can be significantly simplified and optimized with the guidance of a seasoned professional accountant. The benefits of such guidance are twofold: potential tax savings and peace of mind. Here, we delve into key considerations for accurately accounting for your business and professional income.

Accrual Accounting: A Necessity for Sole Proprietorships

For sole proprietors, the accrual method of accounting is not just a choice—it’s a requirement. This method entails recognizing receivables and payables at the year’s end. Receivables, or amounts owed to you, must be included in your tax filings if they were legally receivable by year-end, even if payment is received later. Similarly, payables—amounts you owe—should be deducted as expenses in your tax filings.

Work in Process (WIP): No Longer an Election

For professionals, including a portion of WIP in taxable income is mandatory. WIP represents work completed but not yet billed. The 2018 tax year marked the end of the option to exclude WIP from tax filings. Now, a phased inclusion requires 20% of WIP to be included initially, increasing by 20% each year over five years, culminating in 100% inclusion. WIP valuation is based on the lower of cost or fair market value.

GST/HST Registration: A Threshold Consideration

Service providers must evaluate the need for GST/HST registration, which becomes mandatory when revenues from all sources exceed $30,000. This is a critical step for compliance and optimal tax planning.

NAICS Code: Ensuring Accurate Business Comparisons

The Canada Revenue Agency (CRA) utilizes NAICS codes for business comparisons, making the correct code selection crucial to avoid unnecessary audits. For example, a trucker using a chiropractor’s code could face scrutiny over fuel costs.

Internet Business Activity: Reporting Requirements

Income from internet activities necessitates reporting the top five income-generating web pages and the percentage of gross income each contributes. However, purely informational websites are exempt from this requirement.

Loan Application Fees and Other Deductions

Loan application fees are amortized over five years, reflecting the loan term. Meanwhile, meals and entertainment expenses are subject to a 50% deduction limit, with certain exceptions. Legal and accounting fees related to business or investment income are fully deductible.

Capital Cost Allowance (CCA): Depreciating Business Assets

The CCA system allows for the depreciation of business assets over time, with specific rates and timing determined by the asset’s CCA class. Notably, passenger vehicles are subject to a deduction limit, and the distinction between motor vehicles and passenger vehicles is crucial for tax purposes.

Accelerated Investment Incentive: A Boost for Businesses

The accelerated investment incentive offers immediate write-offs for certain eligible properties, including machinery and clean energy equipment. This incentive, available only in the year of acquisition, encourages investment but requires strategic planning to maximize future deductions.

Business Use of Home: Meeting the Criteria

Deductions for business use of home are available if the space is the principal place of business or is used regularly for client meetings. Eligibility hinges on meeting specific criteria, with deductions calculated based on the proportion of the home used for business.

Conclusion: The Value of Professional Guidance

The tax filing process is not just a compliance exercise; it’s an opportunity for strategic tax planning. At Shajani CPA Chartered Professional Accountants, our team of experts in Calgary, Edmonton, and Red Deer is equipped to assist you with both your personal tax filings and broader tax planning strategies. Leveraging professional accounting services can transform the tax filing process from a daunting task into a strategic advantage.

By addressing these key areas, business owners and professionals can navigate the complexities of tax reporting with confidence, ensuring compliance and optimizing their tax positions.

This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. ©2024 Shajani CPA.

Shajani CPA is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning service.