If you are operating a small business you already know that it is usually a lot of work for you to do everything from sales to services and everything in between. A tax audit is the last thing that an owner needs. There are many fine ways to avoid any problems with the Canada Revenue Agency if you are cautious and keep good records. Doing this, along with some other tips can help small business owners to be sure that when it is time to deal with taxes they have everything in order so that the CRA is reassured that a business is in compliance with tax laws.
There are some simple steps a business can take to be certain they are in agreement and can prove this where the CRA and taxes are concerned. Record everything; file the right forms, keep contractors straight and a few more important details can keep a small business from being put through a CRA audit. The following steps should be a few steps for small business owners to follow in order to be sure that when it is time to deal with the CRA they have all their documents lined up and forms filed so that they will not add the pressure of an audit to the regular stresses of hold and run a small business.
While running a small business it is vital to keep track of all records of everything that goes on with the business. The records should be detailed with all income and every expense recorded. Less than 5% of sole proprietors are actually audited by the CRA. Even with this being the case, it is important to keep very clean records of everything that goes on in your business. The recommended time for a business to file and keep records is seven years in the event your business should be audited. One can buy commercial software or use something like MS Excel spreadsheets to keep track of records for a business.
Any income and outgoing debt should be recorded at least weekly by the business owner. This can be done in Excel and there should be a column for any expenditure for supplies or debts owed, including fixed debts such as rent for the building or property taxes as well as electricity and other utilities. These should be broken down into weekly increments and recorded. Travel and business trip expenses should also be recorded as they are deductible, in addition to, any business cash transactions.
File CRA Forms
The CRA will want to look at all the forms you need to fill out that are obtainable through them. Be certain to fill the entire form out as directed. If something is left blank the CRA will note this and want to audit it. Once you are certain that the forms are filled out properly make sure they are signed.
According to the CRA a calendar tax year is 12 consecutive months beginning January 1 and ending December 31. A fiscal tax year is 12 consecutive months ending on the last day of any month except December. A 52-53-week tax year is a fiscal tax year that varies from 52 to 53 weeks; but, does not have to end on the last day of a month. This does not mean you keep your records yearly. Keep weekly records and file the quarterly or yearly tax reports.
Since the CRA is particularly interested in whether those who are self-employed are reporting their full income all that you earn must be listed. Use the exact figures that appear on your tax forms. The CRA has also been on the alert for errors in T2125, the form used to report incomes from Sole Proprietorship or partnerships.
If the government notices that a business owner is taking a lot of vacations or owns a house or car that is more expensive than what that owner is reporting it will throw up a red flag that will almost surely result in an audit. So be certain all cash is accounted for on your filings.
It is important these workers are distinguished when a small business files so that it does not draw the attention of an auditor. A freelancer must report taxes if they make over $500 in a year.
Tax write-offs must never mix personal and business deductions. It is suggested that anything that will be used as a deduction, such as computers and office equipment be photographed. If a vehicle is used for business then the mileage used for business must be recorded. If a business trip is taken, it is acceptable to take family and make it a vacation; however, only money spent for the use of the business associated costs may be deducted. If there is cross-over in this area, it could cost a small business owner an audit and penalties.
Another way to avoid having a small business audited is to align it with other businesses to show that the income models are steady with ratio analysis. This is particularly important if the business is cash heavy. A “vertical analysis compares expenses relative to gross receipts in a given year. An industry analysis shows how a small business compares to others within the industry as a whole and there are sites for
these kinds of comparison.
Small business owners should be consistent with record keeping and filing forms. A small business that is cash intensive needs to record all cash transactions. The right forms need to be filed for various parts of the business including freelance contractors. Deductible expenses must be kept to only those that are relevant to the business. Using contrast ratios will help an owner make sure that they are on track with other similar businesses and they will be able to prove that they are not hiding money by not reporting cash. Snap of office equipment or other debatable deductibles can be useful as well. If a small business owner follows all these rules they should not attract a CRA audit and if they do, they will be sheltered from fines and fees.
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