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Bookkeeping Tips

Bookkeeping is a major challenge for many small businesses.  We are good at our core business, but may not know much about the bookkeeping side, or don't enjoy keeping the books, or don't have time to keep the books.

Whether you are keeping your business' books yourself, or are hiring a bookkeeper to take care of them, here are some tips to help tame your paper monster, and save you some money, too.

1)     Every week, take 15 minutes to file your receipts.  This can be a simple as stuffing them all into one file, or sorting them by category.  Do what works best for you, but do it.  Having all your receipts in one place means that you won't lose them.  A little bit of effort over the year will ensure that tax time is not a stressful time and you get all your deductions.

2)     If your home phone is also your business phone, take the time each month to go through your phone bill with a highlighter and highlight all of your long distance business calls.  You get to write off a portion of your basic phone charges if you work from home, but this is a small amount, even over the course of a year.  Your long distance charges must be separated out.  Highlight them and make an abbreviated note about who the call is to, if it is not obvious.  Many small businesses lose this as a business write off because at the end of the year they can't remember which calls were for business, and your bookkeeper won't write off any of them, because there is no way for her to tell which calls were for business.

3)    Take the time to staple receipts and bills that are more than one page long together.  This will save you and your bookkeeper time at the end of the year.

4)    Keep a file pouch in your vehicle or in your briefcase for receipts.  Throw your receipts in the pouch as you get them.  Don't stuff them into your pockets, purse, console, briefcase, or glove compartment.  When it comes time to do your books, finding your receipts should not be a treasure hunt.  

5)    Know when your bookkeeping deadlines are.  

        a)    If you have a GST number, you have to file quarterly.  Generally the quarters are:          
                Jan/Feb/March - file by end of April; 
                Apr/May/June - file by end of July; 
                July/Aug/Sept - file by end of October; 
                Oct/Nov/Dec - file by end of January.

        b)    If you have a payroll, remittance taxes have to be paid by the 15th of the following month.  E.g. Feb 15 for the month of January, March 15 for the month of February, etc.

        c)    Taxes must be filed annually, at your year end.  Most commonly, year end coincides with the calendar year.  You have four months to file your taxes, usually due at the end of April, but if CCRA owes you, or you have a nil balance due, a small business operator is allowed to file as late as June 15 without penalty.  If you owe, you would be charged interest from April 30th, but no other penalty for filing late.

Take these deadlines seriously, because the Canada Customs and Revenue Agency does.  Ignorance is not an excuse.

6)    Do some tax planning.  Don't do your taxes, find out you owe $10k and have no way to pay.  You need to be working on a tax plan throughout the year.  Consult a profession if you need to.  If you pay more than $2000 per year in taxes for two out of the last three years, Canada Customs and Revenue Agency (CCRA) will ask you to remit taxes quarterly.

7) Decide how frequently you need financial information.  A really small business may get away with doing books at year end only, but I don't recommend it.  Many small businesses are forced to do their books quarterly because of GST.  If your business is still small enough that you don't have a GST number, do your books at least twice a year.  This will show you where your money is going, and if you are missing any receipts.  Larger businesses should be doing their books on an ongoing basis, with monthly financial statements.

8) What receipts should you be collecting?  Every time you spend money, ask yourself "is this related to my business?".  

Office: keep your stationary receipts, software, computer, tools, maintenance and repairs, office rent (if you rent a space from someone else, you can't rent from yourself unless you are incorporated).  If you work from your own space, you are entitled to deduct a percentage of your mortgage interest or rent based on the percentage of space dedicated to your business (if you have a desk in your kitchen, you cannot use this deduction because it is a shared space), printing of business cards, forms, letterhead, etc.

Business: business license, business tax, business fees, 

Insurance: building, vehicle, WCB, disability. 

Meals and entertainment:  you can write off 50% of your meals and entertainment if you are with someone related to your business (clients or potential clients, suppliers, or employees) - write down the names of the people that you entertained and why, and don't forget to write in the tip amount.  Make sure that the amount is reasonable in relation to your overall income.  If your entertainment expenses are a huge percentage of your gross income, a red flag could be raised at CCRA, and you could get audited.  This is a deduction that is abused, and if you are audited, be prepared to have the names on your receipts called to verify that business took place.

Motor Vehicle expenses:  if you use your vehicle for your business you can write off all, or a portion of your motor vehicle expenses.  You can write off the percentage that is used for business.  Be prepared to prove it to CCRA.  You will need a log book with details of your business usage.  I use my day book.  At the bottom of the page I write the number of kilometers used for business.  The purpose of the business should be obvious from the notes on the planning page, but if it is not, write it in.  Write down the number on your odometer at the beginning of the year, and at the end of the year.  Add up the number used for business and figure out the percentage of business use.   This can be a great business deduction, but you MUST be able to prove to CCRA that your vehicle use is for business or they will disallow it.  The fuel for your vehicle goes under the travel heading, but the percentage is the same.

Your Core Business: keep all receipts related to the cost of your product or service, such as special tools, software, forms, inventory, delivery, freight, licenses, etc.

Advertising: all advertising and networking costs

Interest: interest can be a deductible expense if the loan is related to your business.  If you work from home, a percentage of your mortgage interest can be deducted, if you have a vehicle loan for a vehicle that you use primarily for your business, the interest can be a deduction.  If you have any start-up or other types of business loans, all the interest is deductible.  If you have loans, and the interest is not deductible, learn some of the legal ways to make your interest deductible.  This is a good website learning how to make interest tax deductible:  www.mutualfund101.com

Bad Debts: if you have provided a product or service, and didn't get paid, the cost can be a deduction.  You must make a reasonable effort to recover the bad dept.

Legal and Accounting: your legal fees relating to your business, your accounting and bookkeeping, and your bank charges are all deductible.  Your bank charges are for your business account.  If you don't have a business account and use your personal account for both business and personal, you may deduct a percentage only.

Travel: your travel costs can be deducted if your primary reason for travel is business.  You may be asked to prove this, so write down why you went and who you met with.

Telephone: your phone bills, including your cellular phone.  Be prepared to prove that the usage you claim is for business, especially for your cell phone. 

Heat and Electricity: if you rent an office, this is 100% deductible, if you work from home, you can deduct a percentage based on your dedicated space used for your business.

Property taxes:  if you work from home, a percentage may be deducted

House insurance: if you work from home, a percentage may be deducted

Other house expenses: if you work from home, a percentage may be deducted, other expenses include utility tax, water, house cleaning, and cleaning supplies.  Be wary of deducting a percentage of every dime you spend on your house, if you start to deduct a percentage of every plant that you put in the garden, be prepared to explain to an auditor how that helps your business!  Use common sense. 

Upgrading your home:  if you work from home, and do some renovations to, for example, build a new addition to house your office.  You think it is a great deduction, but it is not!  I do not recommend  that you use household improvement receipts as a deduction.  If you do, any profit you make on your house, from the time you bought it, becomes eligible for capital gains tax when you sell it.  For example: you buy your house in 1990 for $150,000.  In 2000 you put an addition on your house for $30,000 and deduct the expense.  If you sell your house in 2001 for $220,000 ALL OF THE PROFIT, $70,000, BECOMES ELIGIBLE FOR CAPITAL GAINS TAX.  The tax you would pay on the profit from your house (all the way back to when you bought it) will likely never make up for what you would save in taxes by deducting the household improvement expenses.  So if you paint your office, don't deduct it.  If you put up a fence at your daycare that is in your home, don't deduct it.  It is a capital improvement if you do, and your house becomes a capital asset.  You probably do not want that.

Other Expenses: There is a category for other expenses that do not fit in any of the categories above.  Be prepared to detail what is in this category.