If there were one thing that gives business owners more anxiety than running their business successfully, it would probably be tax filing.
Tax laws and regulations are complex to understand and implement. It can be particularly confusing for small business owners to understand which tax deductions or benefits they are eligible for and what information they must submit to the Canada Revenue Agency (CRA). In trying to navigate these complicated rules, a small business owner can often make errors that can be detrimental to the company.
Learning from others’ mistakes can help you avoid them and improve your tax compliance.
5 Most Common Tax-filing Mistakes Small Businesses Make
Most major tax filing errors have two leading causes. Firstly, a lack of focus in one area can lead to unintentional errors in tax filing. Secondly, a lack of proper knowledge about the CRA’s taxation rules can cause mistakes.
1. Incorrect Information
Spelling mistakes in your company name or missing a digit in your account number or Business Number are usually caused by oversight or haste. Though seemingly small, such small errors can cause delays in your tax processing and lead to audits or heavy penalties.
Hence, it is important to double-check and cross-check every detail – names, numbers, totals – before submitting any documents to the CRA.
2. Failing to Report Income
A business can earn income from multiple sources other than business, such as investment income, sale of an asset, or rent from a foreign property. Since these transactions are rare, a business owner might forget to add them to the taxable income calculation. This error could lead to CRA scrutiny and penalty. Different types of income require the filing of various forms. For instance, businesses and individuals must file Form T1135 or Foreign Income Verification Statement to report income from foreign stocks, funds in foreign banks, or even property outside Canada.
Hence, it is important to route all your business income and expenses to a separate bank account under your business name and maintain proper books of account regularly to avoid missing a transaction.
3. Improper Bookkeeping and Accounting System
Poorly maintained books of records, erroneous accounting techniques, missing receipts, invoices, and other financial documents are an invitation to potential CRA audits and fines. Moreover, having a disorganized bookkeeping and accounting system will add to your losses as you cannot get a clear idea of how much you can claim in deductions or credits.
Therefore, it is necessary to have a well-defined bookkeeping system in place, which is regularly reviewed before filing taxes with the CRA. Consulting an experienced bookkeeper and accountant can help you set up tech-enabled, robust systems to avoid gaps in your business’s finance books.
4. Ignorance About Tax Deductions and Credits
Taxation is a complicated subject to understand. While it is true that you must pay taxes on all your income sources, it is equally valid that the CRA offers many deductions, claims, and refunds to small business owners. Most small businesses can claim in part or whole deductions on business vehicle expenses, advertising expenses, meals, and entertainment costs. There are other benefits, such as small business deductions and charitable donations. However, specific qualifications need to be met to claim these deductions and benefits, and documentary proof should be available.
Business expense deductions can be a great tool for reducing your tax bills. However, if expenses are recorded inaccurately, the tax bill could multiply severalfold in terms of penalties in the future if your account comes under scrutiny. For instance, reporting personal use of the vehicle as a business expense or claiming unreasonably high expenses could attract the CRA’s attention.
So, it is in your business’s interest to understand the eligibility of tax deductions by talking to a tax professional and safely keeping all those receipts and invoices. It is always beneficial to consult a tax expert before proceeding with a major transaction because a tweak could save significant tax.
5. Missing Tax Payments and Deadlines
Small business owners must pay multiple types of taxes, including corporate tax, tax withheld from employees’ salaries, goods and services tax (GST), and excise tax, if applicable. Each tax has a different deadline and reporting requirement.
For instance, self-employed and small business owners have to pay the tax owed by April 30, while they can file their returns by June 15. However, If your net tax bill in the current and two previous years is over $3,000, your business has to make quarterly tax payments by the 15th of March, June, September, and December. Missing tax installment deadlines could attract interest on the tax owed and a penalty if the interest exceeds $1,000.
Working with an expert accountant can help you with precise tax instalment calculations and timely reminders about payment due dates. Ensuring they are made on time can save you a lot of mental, physical, and financial stress.
While working out the taxes for your small business may seem like a smart cost-cutting trick, any overlooks or errors you might make in calculating or filing taxes can ultimately cost you more.
Contact Glenn Graydon Wright LLP in Oakville to Help You with Tax Filing
A professional accountant could help you maintain the bookkeeping and accounting of your small business and set up processes to ensure transactions qualify for deductions. At Glenn Graydon Wright LLP, our accountants and bookkeepers can provide services such as tax planning and tax filing. To learn more about how Glenn Graydon Wright LLP can provide you with the best accounting and bookkeeping expertise, call us today at 905-845-6633 or connect with us online to schedule an initial consultation.