This article explains the 3rd benefit of preparing for year-end accounting throughout the year: capitalizing on tax saving opportunities.
There may have been some groans, maybe even an eye-roll or two when seeing there was a series on year-end and accounting – we understand, it’s not always the most enthralling topic to read. However, despite the opinions and preconceptions people may have on the subject, there can be some exciting things about accounting! Still not convinced? Would you believe us on the “exciting” part if we said there are opportunities to save money within the business by using an accountant throughout the year? Rather than waiting until the end of the year to catch up on everything required for the accountant to complete taxes, it is recommended to stay in contact regularly throughout the year to maximize the benefits, which includes tax saving opportunities.
This is the final article in a 3-part series. If you are interested in the previous benefits, check out the first two articles: “Cost Savings” and “Avoid Government Penalties.”
Let’s look at 3 of the tax savings opportunities an accountant can help with throughout the year.
1. Strategize Capital Cost Allowance (CCA)
Capital Cost Allowance is one of the many ways to reduce a business’s taxable income in Canada. It is a tax deduction that allows a business to claim the loss in value of capital assets from wear and tear or becoming obsolete over a period of years until the asset fully depreciates. You can’t deduct the entire cost of a capital asset in one income tax year. A Capital Asset is property that is considered to generate value over a long period of time and could include things such as property, buildings, computer equipment, machinery, and vehicles. Capital Assets tend to have the following characteristics:
- Expected useful life of more than one year
- Not sold as a part of normal business operations, such as inventory items
- Tends to not be easily convertible to cash
While CCA is a known concept among some business owners, it is not common to understand that the CCA doesn’t have to be claimed the year it occurs. As this is not a mandatory tax deduction, business owners can choose to claim as little or as much of it as they want in a tax year (up to the maximum), This means any unused portion can be carried forward to offset a larger taxable income in the future.
So why is it important to stay in contact with an accountant throughout the year regarding this deduction? Accountants are able to recommend the best time to claim CCA deductions and can also recommend the right time to buy and sell assets throughout the year. They are also aware of the rules and laws around CCA deductions, including maximum claim amounts such as the 50% rule, which will help to maximize the tax saving opportunities to capitalize on.
2. Recommended Credits and Deductions
Another great way accountants can help maximize tax savings throughout the year is by ensuring other deduction opportunities as well as federal and provincial credits are not being missed. It is usually during the busy tax season that business owners begin thinking about how they can maximize their tax savings, which can sometimes be too late to make an impact. Staying in contact with an accountant regularly throughout the year means they can advise how to make strategic decisions that will help to maximize the year-end deductions to lower the taxable income. Accountants are also able to recommend any provincial or federal tax credits that are available for the business.
Many of these recommendations include working in tandem with a bookkeeper and using bookkeeping software to properly track financial items such as expenses. It is important to know that the deductions and credits that can be claimed are dependent on the type and size of the business owned such as a sole proprietorship, partnership, small business, or corporation, which accountants can offer valuable information about. It is also critical to note that the CRA will not accept credit card statements as proof of purchase and will require a receipt for the expense, so it is important that all expense receipts are being recorded in bookkeeping software while also uploading a copy or keeping the physical copy. These deductions could also include out-of-pocket expenses, home office expenses for workspace used at home, vehicle expenses when required for business use, cell phone, and salary paid to an assistant – again dependent on the type and size of the business.
3. Avoid an Audit
One of the most compelling benefits of keeping in contact with an accountant to prepare for year-end taxes throughout the year is avoiding a dreaded audit from the CRA! Many people think of an accountant once they have already been notified about an audit and hope they can fix issues after they have occurred. Unfortunately, this is not the case, and it is important to remember audits can easily be avoided by receiving the guidance and counsel of an accountant year-round. A business can be audited for many reasons including too many mistakes on tax forms, excessive write-offs or deductions, and even being “too” charitable; most of which can be avoided with the knowledge of an accountant.
In the end, avoiding an audit will save business owners time and money, as it can be very time-consuming to go over the records the auditor requires and this usually requires the accountant to go through the requested records with the auditor. If there are any issues found, there can sometimes be penalties applied or money owing that was not expected. Plus, beyond time and money, this also saves the stress of going through that process which is invaluable!
The Bright Side of Accounting – Tax Savings!
There we have it – 3 reasons why accounting can be exciting, by offering tax savings opportunities. By staying in contact with an accountant year-round for guidance and counsel they can help strategize tax deductions including CCA, recommend federal and provincial credits, and can also help in avoiding a dreaded audit from the CRA. We could even say these cost savings are the bright side of accounting!
While this series explained the benefits of preparing throughout the year, stay-tuned for our series which will include explanations on what exactly needs to be prepared throughout the year as well as year-end for taxes.