Pam works full-time for a firm but she wants to use her technical skills to start her own app-development business in Ontario, Canada. Pam is currently freelancing to test the waters and just wants a minimal setting to organize her finances. Someone told her that she could get more out of her tax refund if she claims freelance business expenses, but how?
Step 1: Make Money First
For your small business, how did you make it official? Did you register your business?
No, I didn’t have to since it’s my personal business (sole proprietorship) and I make less than $30K a year right now. Until my business makes that much, I can record my earnings as additional income. I’ve decided to wait to see if my business will expand before registering.
Sherpa tips: Pam can register her business name through the government website before registering her business to the CRA. This is so Pam can reserve her business name. Otherwise, Pam’s full legal name functions as the business name.
Step 2: Record Business Expenses
What’s the must-to-do then for now?
I must record my business expenses to maximize my tax benefits. Even though I make little revenue from this business, I can still deduct business expenses from my income tax.
Of course the deduction has to be reasonable. For example, I can deduct home office expenses such as rent (or mortgage interest), internet, hydro, and insurances, though not 100%. I use about 25% of my home as office space, so that’s what I claim. Other deductibles include:
- Transportation costs
- Food & entertainment (e.g. networking over meals and other business-related engagements)
- Laptop, equipment, software, books for training etc.
- Professional costs including accounting fees
- More easy-to-read article for small business expenses is this.
What do you find is the most efficient for organizing your expenses?
Since my business is still small with not too many transactions, I gather all my receipts in one folder, and set up a spreadsheet to record the money-ins and money-outs for each quarter. It’s a very rudimentary way of bookkeeping for now, but the key is to strictly keep track of my records. I just use my Google Sheet for now.
Step 3: Separate Business Finances From Personal Finances
Have you found ways to make the bookkeeping easier?
Keeping track of records everyday can be tedious. A lot of people advised me to separate my business finances from personal finances in order to make bookkeeping easier.
I also decided to use one credit card for business means only (It’s just one of the regular credit cards I have). I opened a new bank account to keep all my business-related revenue in one place and pay the credit card bill. This way I can review my numbers monthly instead of weekly. I make sure to watch my account balances and to not miss credit card payments. I’ve applied for overdraft protection just in case.
Once my business is projected to make more than $30K a year, I’ll have to register my business with CRA and set up a proper small business account. In principle, I could register my business before any revenue is generated, but I simply don’t want to hassle with it now as I am busy testing my market. I want to see where my business will be in the next 3, 6, 9 months first, before taking my it to the next level.