Tag Archives: small business

For The Love of Taxes

This morning I went to drop off some tax papers to a client. She had some great questions, so I spent 40 minutes explaining how her tax return worked, and going over some of her previous year’s returns. She was trying to get an idea of how the various pieces of a year of her life could be summed up in a bunch of numbers grouped together on far too much paper.

She’s a very smart person, but was never taught how all this works, and that seems to be the case with most people.

That’s really sad. Partly because it’s a life skill we should all learn as teenagers, and partly because I love it and I want other people to experience the same joy when they do their taxes. Ok, maybe joy is pushing it, but if we strive for joy and land on something a little more positive than dread, that’s a win.

I like to think of taxes as that scary kid in class with the mohawk. The one that most kids were a little afraid of, but once you got to know them they weren’t so bad.

Love of Taxes: The Origin Story

When I was 15 my Dad showed me how to do my taxes. At the time we were doing them by hand, so I had my pencil and my calculator out, and we would go through every line. My return was very simple at that point because I only had one T4, but it was so fun. How could get as much back as possible? How can I play the government’s game and win? (without cheating though, ’cause I’m not in to that).

Then one day I was hanging out with my group of friends and I noticed one of them had “T4” written on his hand. I asked him “hey, are you doing your taxes?” He said I was the only person who knew what that meant. I jumped on the chance. “You want help?!”

By the time I was 16 I was doing all my friend’s taxes… by hand.

I don’t do them by hand anymore, but I’m still doing my friend’s taxes. Every now and again they’ll get a Notice of Assessment from the CRA (Canada Revenue Agency) asking for proof of expenses, like child care receipts for example, and it’s presumed the tax return was filed incorrectly until they see and approve those receipts. (The CRA doesn’t believe in innocent until proven guilty, you’re wrong until you can prove otherwise).

Surprise bills are never fun, but it seems to be so much worse when they come from the CRA. It feels like those bills are written in some kind of code, and you have no idea what they’re asking for. So frustrating.

These stress-inducing letters are exactly why I think we should starting learning about taxes as teenagers. Guess what though, it’s not too late to learn!

As adults we can learn how our taxes work, and remove the uncertainty and stress that comes with them. Even if we never want to actually prepare our own taxes, we can still have a better understanding of how it all works, and be able to have more informed discussions with our tax professionals.

This is especially true for sole proprietors. Our business taxes and our personal taxes are one and the same, so having an understanding of the system is part of doing business. How much should I set aside from every sale? What expenses can I deduct? Do I need to charge sales tax? How does that work?

As your business becomes more complex, so do your taxes.

The first step to reducing tax stress is to be organized with your paperwork, Don’t think of taxes as a once a year event, think of them as something you maintain. It’s like oral hygiene. If you only brush your teeth once a year, things are going to get gross.

The best results come from healthy tax habits like regular receipt management and bookkeeping.

Kaitlin

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The Burden of Incorporation

You have this amazing idea, you know you can help people, and you’re sick of your 9-5 job – so you make the choice to start your own business. It’s scary, but SO liberating.

Great! You’ve decided! You’re doing it! Yay!

Now what?

Should you incorporate? It would feel so official to incorporate. You’d have a real piece of paper saying you owned a company! You could take a selfie with it to keep as a record of this exciting new chapter in your life!

Let’s slow down. I totally understand this feeling. When I started my business, I wanted everyone to know. I was SO excited to go on an adventure and leave my old life behind.

An Incredible Journey

On your journey, you need the right tools. Think of your business form like a backpack. You want your pack to be the right size and weight for the adventure you’re on, so it doesn’t slow you down, but has everything you need in it.

If you’ve headed out for a day trip, maybe a small backpack that can hold your lunch and a couple water bottles is all you need. It would be nice and light, but would have everything you needed for the day.

What if you wanted to go on a multi-day trek up the side of a mountain? You’d want to have a big camping pack with a tent, a sleeping bag, a change of clothes, and a bunch of food and water.

Now think about having that big camping pack on your day trip. It would take far more energy to haul that pack around than the small backpack with just your lunch.

Business forms are the same. Think of the camping bag as a corporation. There are times when you absolutely want to have a big, heavy corporation for your business, but if the benefits of having all that structure is less than the weight of it, don’t incorporate.

There are a number of considerations when you’re deciding whether or not to incorporate your business, here are my top five:

Risk

A corporation is a distinct legal entity separated from you as a person. This arms-length distance can be especially important if you are working in an industry that is exposed to risk.

In the unfortunate event that your company is sued the assets of the company are at risk, but the lawsuit would not be able to touch your personal assets. At least in theory… in practice it is not uncommon for the business owner to also be personally named in a legal claim. (if you are concerned about your business liability, you should be consulting a lawyer to have this discussion)

Start-up Cash

If you need a bunch of money for start-up costs, a corporation will allow you to sell equity (shares) in the company or to take on debt to generate the funds you need. Except that a new corporation has the about same credit rating as a teenager who just moved out, so loans can be a challenge.

As a sole proprietor, you’re limited to your savings or the amount someone (like a bank or your Grandma) is willing to lend you.

Transferability

Are you in business for life, or planning to make fast money and a quick exit?

A sole proprietorship isn’t transferable. Somebody can buy your individual assets (like your equipment, website code, and rights to your trade name), but the business itself can’t be separated from the owner.

A corporation has shares, and shares can be transferred. It’s by selling shares that you’re able to sell a corporation
and everything that goes along with it. You can sell the assets of a company, but then you’re left with shares of a company with no assets, so that’s a whole other conversation.

Paying Yourself

As a sole-proprietor all your business income IS your personal income. Technically, there is no dividing line. (Though, for the sake of your sanity and success, I really recommend keeping very separate records for yourself and the business)

Your personal taxes and bookkeeping will become much more complicated than you may be used to as an employee.

When you incorporate, the tricky part is then actually paying yourself for your work. As an individual you’re taxed on any money you pull out of the corporation. That means for the corporation to be worth it, the total amount of taxes paid by yourself and the corporation needs to be less than if you paid tax on all of the income personally.

A corporation is a separate legal entity from yourself, which means you need to file a separate tax return. These are not easy returns, even if the company didn’t do much in the year. You’re going to need an accountant to prepare the taxes, and it won’t be cheap.

There are a few tax planning opportunities with a corporation, but if you’re not making a certain level of income, it doesn’t matter.

Flexibility

It’s a paperwork-intensive process to incorporate a company and it takes a little while. You have to file annual reports whether or not the corporation had any business activity. It also must be closed (which means still more paperwork) if you ever wanted to quit.

A sole proprietor on the other hand, can just start doing business (make sure you have the proper licenses) and can stop whenever they want to. There’s a lot more flexibility there, so if life gets in the way, no big deal!

My general recommendation is to start out as a sole proprietor and only incorporate when it becomes beneficial for you. This article is by no means an exhaustive list of reasons for or against incorporation. If you’d like to chat more about this, I’d be happy to help you out https://www.kirkcpa.ca/contact

When you start out on a business adventure, just grab the small backpack that’s already in your closet and head out the door. While you’re out, if you decide to take on a much longer and more complex adventure, you can always go by the camping store get yourself a bigger backpack with everything you need in it.

Kaitlin

P.S. If you’re on a business adventure come join us in the Captains Harbour community! We’re business captains that have come together to chat and get support on all things accounting and taxes!

Shoes Boxes Are For Shoes, Not Receipts

My mouth dropped open as I took the bin full of page protectors, grocery bags, and some other unidentifiable container all overflowing with receipts.

It was early in my career and I couldn’t believe this was for real.

Was I being punked? Was that an actual shoe box?

Yes it was, and no I wasn’t.

I have since learned it’s actually really easy to squirrel away receipts and end up with a pile of them to deal with all at once, or worse, not keep them at all.

Confession time. I’ve been that small business owner.

Sorting through receipts is time consuming and tedious, and not how you want to spend your time. Nor is it how you want your bookkeeper or accountant spending their time, because either way, you’re paying for it.

That goes double if there’s a fast approaching deadline looming over you.

Receipts are SO inconvenient. We always have to do something with them at the most inopportune time. Like at the gas station for example, you’ve just finished pumping your gas, you grab your receipt and get in the car to drive away.

Now it’s in your hand and you have to do something with it, but you only have about 2 seconds because the person behind you is impatient, so it goes in your pocket/wallet/purse/glovebox/anywhere you can stuff it… and there it stays, for months.

Believe it or not, stuffing our receipts into the nearest receptacle isn’t the issue. It’s not having pre-determined receptacle to collect them, and then not sorting them regularly, that’s the issue.

That’s how we end up with a pile of them to deal with, and potentially missing ones when we realize it’s tax time and those little bits of paper are suddenly SO IMPORTANT.

So how do we solve this problem?

My first step (now) when I get a receipt is to take a picture of it. It takes two seconds and now that little piece of paper can go in the recycling.

Pro tip: this only works if you get a receipt (obviously) so remember to ask for a receipt for everything.

What you bought, the date and the amount need to be clearly stated on the receipt. So if you go out for lunch, the debt machine receipt isn’t enough, you need the itemized one too.

That’s step one – take a picture.

Step two is to create folders in my cloud (or is it on my cloud?) for the year and then subfolders for the category my receipts belong in. For the gas receipt I would have a folder in 2019 called Vehicle Expenses.

I give them a naming convention that makes sense and tells me what I need to know. Because I use a bookkeeping software that pulls my bank transactions automatically, I don’t need to enter the receipt manually. I name the file based on where I was, the way I paid for it and the date if my phone/computer isn’t very good at date stamps. The gas receipt might be Esso-Visa 2405-March 14.

If it was a meal with a meeting, I’d probably add the name of the person I met with as well. I could then match it up with my calendar to prove I did in fact have a business meeting and not just lunch with my friend.

That’s honestly all you need. No more paper receipts! Win!

Pro tip: if you hate paper receipts as much as I do, it’s kinda therapeutic to tear them to shreds before they get recycled.

If you have a bookkeeper that you give your receipts to, you can give them access to your cloud folder, and they’ll have everything they need.
No more collecting boxes of receipts to hand over! Win-win!

If you know you’re not very good at taking pictures when you get receipts, make sure you put them in the same place every time, and block out 30 minutes in your calendar once a week to take pictures.

What about electronic receipts, like the ones you get emailed to you? Save those to your cloud folders too. Everything can and should go in there, so if the Canada Revenue Agency ever asked to see your receipts, you’d have everything ready to upload to them – without any panic or stress.

All. The. Wins.

Kaitlin