Taxes

[dipmicro]

Can someone advice on these:

. What portion of a car, which is used for both personal and business purposes, can be claimed as expense?

. What portion of a mortgage payment can be expensed without needing to claim capital gains from the house sale?

I know what you are thinking - get an accountant - and I will. But we have been quite oblivious to taxes and I really would like to submit this one on time, but did no bother booking the appointment with accountant I worked with previous years. I cannot just drop-in on Monday and say "Hi, I need my taxes done by Tuesday".

Our books are getting in a good shape now, so I will submit what I have and he will check it later and if there will be any discrepancy, I will amend the return after receiving the Notice of Assesment (that's the proper method to do it I think).

Anyone can throw in some advice regarding two questions above? Thanks to all. Back to books 🙂

[fatdane]

For car expenses you should be keeping a log of km traveled for business use and for personal use. I note the starting km, the final km of a trip, where I'm going, ie a sample entry would be start 100,000 km, end 100210, destination US Post Office Fort Gratiot, MI & return, total km traveled 210 km. Its fairly simple to work out the percentage of expenses that could be claimed as a business expense. I believe that some calculate the total business km and then multiply the km times what the Feds allow the public service to deduct for km driven when on expense account. Whatever method you use be sure to have the mileage log - without it your dead meat, and with it you may still have "fun" with an auditor. Historically Canadian Tax auditors take a hard look at car expenses and love to disallow expenses.

If most of your income is from self employment you have until June 15 to file your return, but if any money is owing the Govt wants it on April 30 or they start charging interest.

As for house expenses, if you have a room ( or rooms) totally devoted to business use, add up the number of rooms used for business, divide by the number of rooms in the house, and then work out a % of house used for business, and calculate the expenses for things like mortgage interest, hydro, heating, etc.( Last time I was audited the auditor accepted my ratio using a room count ratio with no problem) Before claiming depreciation on a house it would be wise to have a long conversation with a good accountant. In general if you do not claim depreciation then there will be no capital gains when you sell, but if you claim depreciation then there will be capital gains, and this area can be a nightmare. Talk to a tax pro about this area though.

[dipmicro]

Thaks fatdane. I was talking about purchasing the car not the mileage.

I am still at my 2006 books (I have to file two years to catch-up) and we purchased that year after registering the business. We occasionally used it to go to post office, to customer or business related meeting with suppliers, but I did not keep a log.

Perhaps there is a allowance up to certain percentage even if one does not keep the log.

How about maintenance and insurance cost?

[fatdane]

Start keeping a mileage( kilometermilage?) log now. If you are audited and have no records to verify any mileage claim CRA can be very unfriendly. Most who have fought CRA in court re car expenses have lost if they did not have a basic log of km driven. Once you have a log you can then calculate the portion of car expenses that will be allowed but you have to have the mileage log. If you start keeping one perhaps you can perhaps reconstruct for previous years but be prepared for CRA to question car expenses. If you are late filling you are already a larger target for an audit.

[dipmicro]

I just stopped by, still doing the taxes ... well, I was pretty naive with those taxes and deductions. For those who might need this info as well and are naive as myself to do their own taxes - car similarly as computers is a capital expense and can be deducted over period of several years as it depreciates.

Boy, after this exercise at least I will do proper bookkeeping. Long live the spreadsheets.

[fatdane]

The cost of buying a car is a capital expenses, but the costs of running a car are current expenses and don't need to be depreciated

[dipmicro]

Perhaps if you buy it under $500 you could place it in Class 12 and do a 100% deduction 🙂 Although I would not like to drive a car that cost less than $500 🙂

I did purchase few computers and PDA in 2007 that were below $500, so I am thinking of marking them as Class 12 instead of Class 45 CCA. Anybody can comment on this?

[dipmicro]

Nevermind I type faster than I think sometimes ...

Class 12 explicitly excludes electronic communication devices and data prodcessing equipment.

[whoscloset]

I believe they substantially shortened the depreciation time on Class 45 in recent years.

[recped]

I don't know what class computer equipment falls under but I also thought the depreciation period had been reduced to 2 or 3 years (it may have only been temporary).

[dipmicro]

Guys, one more question. I have little trouble understand the accounting of inventory, it does not make sense.

First of all, purchasing inventory for resale does not seem to be a deduction.

There are two methods valuing your inventory (T4002, chapter 2). The first method says: Use either the price you would pay to replace the item or the amount you would get if sold an item

So if I set my book values of my inventory items at my retail prices (the value at which I sold the item), my gross profit - line 8519 - becomes zero. I don't think this is right.

Another problem I have is that when currency fluctuates, pricing of your supplier fluctuates and you keep buying the same item over and over at different conditions, the Cost of Goods Sold calculation may be extremely innacurate. The T4002 booklet is quite vague on this.

[whoscloset]

Inventory only becomes a Cost of Goods Sold and ends up on your Profit and Loss once the item sells.

Any inventory you currently have in stock that HASN'T sold yet is an Asset, at the rate for which YOU PAID for it and belongs on your Balance Sheet. It is NOT a deduction until it sells.

[dipmicro]

Thanks Monique.

Anybody has t2124-07e.pdf? Revenue Canada website is down since yesterday.

[pierrelebel]

"my book values of my inventory items at my retail prices "

Inventory must generally be valued at cost.

To calculate your cost of goods (for example):

Opening Inventory (12/31/2006) 100,000
Purchases during 2007 50,000
Available for sale 150,000
Closing Inventory (12/31/2007) 80,000
Cost of Goods Sold 70,000

If your sales for the period were $120,000, your gross profit would be $50,000 ($120,000 less $70,000)

From your gross profit, you deduct your expenses such as:

Advertising
Office
Communications
Travel (car)
Listing Fees and Commission
Occupancy
Bank Charges and Interest

To arrive at your Net profit (line 135)

As far as car expenses are concerned (I own my car), I find it much easier NOT to depreciate but to use a flat charge of $0.50 per km for business use during the year. If you use your car for business purposes for 5,000km, a $2,500 would be deductible. One must keep logs.

I was audited for the last two years and that simple method was accepted without question. .

[dipmicro]

Done and send. Eventually it turns out I am in for a refund so did not really need that April post-mark, but one never knows if they would reasses it differently. I think we should survive audit as well, all our books are complete now.

This was my first business return and I did 2 years in the last 4 days. Since we did not keep travel log so I did not claim any vehicle related expenditures.

Thanks everyone, you guys have been quite helpful.

[ameroindustries]

The company owns everything of mine .

The House (i pay rent) The 2 Trucks The Car (just pay so much a year for useing) All my computers are owned by the company . Everything i have .

Except this year it gets tricky cause i gotta break in to another company cause once you make over 400k+ a year your taxed like 40% er something . So one company has to rent from another company ect .

:D

[dipmicro]

once you make over 400k+ a year your taxed like 40%

Unless you spend it. Don't forget the wages count as expenditures. Give yourself, your dad, your mom, your kids salaries (for some work they will do for you) and keep the money in the family.

[pierrelebel]

"Give yourself, your dad, your mom, your kids salaries "

...and dividends which are taxed personally at a lower rate once you factor the dividend tax credits. .