Common Mistakes Small Businesses Make That Can Cost Extra Tax And Penalties Unnecessarily
In this day and age, starting a business of your own is not uncommon, especially with a lot of avenues for small companies, with benefits and programs to help stand on their own feet. When starting out, being understaffed and overworked is the norm and usually means running from one deadline to another, and very often the smaller pieces fall through the gaps, the most common being accounts and taxes.
Although taken for granted, taxation is one of the most critical parts of any business. Rushing to handle your accounts and tax at the end of the year can be a hassle even if it is delegated to an accounting team as most of the documentation needs to be provided by you. It is essential to get your basics correct and keep everything in order throughout the year. If you are in a fix, get help as it is better to begin on the right foot, than rectify anything later.
If you’re a small business owner Daryl McClure & Co CPA wants to help you avoid some expensive errors, which is why we have put together a list of common costly mistakes made by small businesses.
1. Not reporting HST correctly on a business vehicle or equipment trade-in.
Most small businesses just claim the net Input Tax Credit (ITC) shown on the invoice. This is incorrect, and the CRA can assess interest, possible penalties, and an offsetting ITC could potentially be lost costing $1000’s unnecessarily. The trade-in has to be reported as a sale. In such a case, the reported sales value for Harmonized Sales Tax (HST) purposes is increased by the value of the trade-in, and the reported HST “collected” amount is increased by the regular amount of HST chargeable in your province, and an equal and offsetting ITC is added to the ITC claim.
The net effect here is zero, but if not reported properly the CRA can re-assess and end up becoming quite expensive.
2. Incorrect HST claims for Input Tax Credits.
This is quite important because whenever it is underclaimed or overpaid, it is dollar for dollar money lost out of the taxpayers pocket. This is unlike expenses for income tax purposes, which tax cost/savings are only a portion of the expense value. In the case of a small business corporation, the taxable income error only has out of pocket costs of 12.5% at the current time. Whereas, if the CRA reassesses extra HST or extra dollars for an error, it costs 100% of the amount, plus interest, and even penalties if it was originally filed late, or if they allege gross negligence, which is a 50% penalty. So, it is imperative to get these claims and reporting correct, especially if large amounts are involved.
If unsure of what to do, seek advice from an accountant.
3. Purchasing expensive four door trucks and SUV’s without first contacting your accountant.
There are special rules for specific vehicles costing over $30,000, that can cost extra tens of thousands of dollars in denied HST Input Tax Credits and income tax deductions for any values above $30,000 if the vehicle use doesn’t meet certain criteria.
At least 90% of the vehicle’s use should be to transport goods and supplies, and/or equipment, and/or employees/fare-paying passengers.
Even though the criteria are strict and precise, where often taxpayers regular use will not meet these requirements for full deductions and credits, the criteria only need be met in the year of the purchase.
If a regular user isn’t going to qualify, the business owner needs to buy the vehicle very close to their year-end (including the very last day), and make sure all uses qualify, document them, and park it if necessary until the end of their fiscal year.
4. Failing to record your business travel in a log.
If you don’t, you can expect the CRA to deny some or all of your claimed vehicle expenses. If the CRA requests your travel log, they allow you to build it after the fact as long as you have solid proof of where you travelled and why, such as an appointment calendar.
5. Invoice in shareholders personal name.
Occasionally when shareholders buy what is intended to be a company paid asset or expense, the invoice gets made to them personally. This can cause huge problems when claiming HST by the company, and claiming the expense for income tax purposes. The expense can be denied by the CRA if not in the company name. Sometimes, this happens as an error/oversight on the part of the party making out the invoice, but in other cases, it can be purposeful because the company isn't able to finance a purchase (such as a vehicle), and the shareholder has to become the borrower. This is a problem and needs to be avoided.
If you find the invoice has been made out in the shareholder’s name, immediately get it corrected or in the case of financing, changed to the company name. If the vehicle is already registered with the license plates, it needs to be changed to the company name. In Ontario, this also means getting a safety check (if you catch the ‘error’ right away, then the original safety check should be able to be used for this transfer).
To avoid these and other mistakes, reach out to the experts at Daryl McClure & Co CPA. With over sixty years of combined experience, we service owner-managed businesses and individual clients with the goal of understanding their businesses and problems so we can help them be as successful as they can. We do this by providing services for accounting and bookkeeping, income tax, HST, dealing with CRA, Trusts, and Estates. We also offer planning and advice regarding tax, business (new/startups, expansion/growth/budgeting, improvement), succession and estate, and personal financial planning. We have clients in multiple industries, but we have specialties in farming and residential construction, and also have expertise in manufacturing, distribution, investment property.