It's Tax Time!!! What Exactly is a Write-Off?

Self Employed people hear that all too often.  “Just write that off!!”  It is important to know what you can truly write-off, how to keep track of ‘write-offs’, and what they do for you.  

So, what can you truly write off?

Disclaimer, disclaimer!!!  I AM NOT an accountant or bookkeeper.  Everything listed below is based on my own research and experience and have assisted me in understanding and estimating my personal tax situation.  If you are making decisions based on this information – please double check with your accountant.

Write-offs, put simply, are expenses you incur to help your business earn money.  In part three, I’ll explain more about deducting these business expenses from your business income to estimate taxable earnings.

This clip from Schitt’s Creek is a hilarious depiction of what goes wrong when write-offs are misunderstood:

Here is a link to the Canada Revenue’s website and their list of Business Expenses.  The expenses claimed must be incurred to support the business.  In other words, personal expenses – those not related to operating your business cannot be claimed.

Here are some examples of eligible expenses:

  • advertising costs
  • business start-up costs
  • fuel costs, insurance
  • legal or accounting costs
  • office expenses
  • meal & entertainment **

While most expenses are 100% deductible, only 50% of meal and entertainment related expenses can be claimed.  So, let’s say you spend $30 for lunch, you’d only be able to claim $15. 

To simplify further, if you earn $40,000 in the year, and only have this single business expense, your tax deductible income would then be $39,985 ($40,000 less $15).  In other words, rather than having your income tax owing calculated from an income of $40,000, you would now have your tax calculated based on an income of $39,985.  

As depicted in the video, one wouldn't save the entire $15 for lunch.  The amount saved would be the difference in the income tax payable at $40,000 versus $39,985.  And, depending on the tax bracket - the savings in income will fluctuate.  Those with a $100,000 income would save more than someone with $40,000 income.

If you use your home for your business, you may be able to claim some of your home expenses too.  Again, a link from CRA in this regard.  These expenses are more complicated and are a really good reason to reach out to an accountant.

Tomorrow, I'll detail how to track these expense to ensure you can claim them come tax time.