Gross versus Net Income

 

In business, where gross refers to the total income, net refers to income after all expenses, overheads, taxes, and interest payments are deducted. The difference in value between these two amounts can be significant.

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As the head of your business, it is important for you to know:

  • The difference between your gross and net income;

  • How gross and net express themselves in the context of your business; and

  • That your accountant emphasizes profit and net worth over gross figures and helps you to track and measure both constantly.

 Seldom do business owners spend time analyzing, and re-analyzing, what parts of their business—what services, what clients, what facilities—are the most net profitable. Business owners often allow low-profit considerations to consume the same resources as high profit ones, paying exorbitant amounts of money for unnecessarily large offices, an excessive number of staff, and other features used to impress people without profitable purpose.

 For the health of your business, it is incumbent upon you—and your accounting team—to consider your expenses and ask yourself: How much does this contribute to net? Because without net viability, all other perceived benefits are unsubstantial.

 Stonehenge Accounting can help your business maximize its profit by tracking and measuring your profit and net worth.

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What is income splitting and how do I use it to maximize returns?

One of the keys to tax planning in Canada is the concept of income splitting. This is the process of maximizing income taxed at lower rates and minimizing income taxed at higher rates.

While the federal government has already eliminated some forms of income splitting, and is currently exploring actions to further limit this, there are still many legitimate ways to shift income from one tax rate to another.

 However be careful! If you don’t understand the complex rules around what is and isn’t allowed when it comes to income splitting, be prepared for a costly audit and tax battle. It is important to carefully map out your income splitting strategy with your chartered professional accountant well in advance of tax season to make sure you are following the tax code properly.

Here are some income splitting strategies for you to consider:

– Family Income Splitting

This involves transferring income between family members, especially to those in the lower tax brackets. This can be achieved using RRSPs, loans, dividends, and salaries.

 – Personal Income Splitting

Income can be transferred from one year to the next by using RRSPs, reserves, losses, and by timing discretionary expenses.

 – Corporate Income Splitting

Since a corporation is often taxed at a lower rate than you would get personally, it can be advantageous to defer income in a corporation and save tax by smoothing out your personal income year-over-year.

 

Income splitting is a very complex subject with many rules that must be followed. Contact us today to discuss how you may be able to incorporate forms of income splitting into your tax planning strategies.

5 Things Small Businesses Can Do Now To Save Money Come Tax Season

As the old saying goes, there are only two sure things in life: death and taxes. For many small businesses, this has become more of a reality than ever. The federal government has recently proposed changes to the tax code which are sure to negatively affect many corporations. In fact, these changes could even result in "double-taxation" for some entrepreneurs.

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To make matters worse, the federal government has invested $444 million in the Canada Revenue Agency (CRA) to increase the number of tax audits that take place each year. This is expected to generate an additional $2.6 billion in tax revenues over the next five years. As small businesses are often prime targets for CRA audits, this is sure to cause more headaches for owners, not to mention the potential cost of the CRA penalties and interest that would be incurred if any errors are found. 

While the deck may be stacked against small businesses, there are still many tax breaks available to keep hard-earned money in their pockets. But simply filing a tax return at the end of the year won’t cut it anymore. Why act now? Taking these small steps could save your small business hundreds, if not thousands, of dollars come tax season.

1.       Keep your Records Complete

The best, simplest (and yet most overlooked way) for small business owners to save taxes is by keeping their business records complete and well-organized. In fact, many small businesses pay far too much tax simply because they do not commit to a system that keeps track of and records their business expenses. Not only does this save money through a lower tax bill but it also protects you if the CRA auditors come knocking at your door.

If you are just starting out, the easiest way to keep track of business transactions is to have an envelope for each type of income and expense that your small business has, and place each receipt into its respective envelope throughout the year. As your small business grows you may want to consider moving to a software solution that can handle more complex business transactions. These software packages also provide you with valuable reporting tools that will help you better understand how your business is performing throughout the year. 

2.       Split your Income

One of the keys to tax planning in Canada is the concept of income splitting. This is the process of maximizing income taxed at lower rates and minimizing income taxed at higher rates.  While the federal government has already eliminated some forms of income splitting, and is currently exploring actions to further limit this, there are still many legitimate ways to shift income from one tax rate to another depending on your business’ legal structure, family situation, and other factors. It is important to carefully plan your income splitting strategy well in advance of tax season.

3.       Track your Capital Assets

To operate any business, capital items like furniture, computers, office equipment and other useful assets are essential. These major purchases typically have a high up-front cost, but can often only be written-off over time for tax purposes. It is important to carefully consider the tax implications when making the decision to either purchase or sell a capital asset as there are significant tax savings to be had by timing these transactions correctly.

4.       Deduct Home Office Expenses Properly

If you operate a home-based small business, you may be eligible to deduct a portion of your home expenses that would otherwise not be tax deductible. These expenses could include things like mortgage interest, insurance, maintenance and repairs, utilities, and property taxes. As home expenses are only partially tax deductible, it is important to track them separately from your business expenses throughout the year. You may also want to consider where in your home to conduct business as this can have an impact on the tax savings available.

5.       Vroom! Deduct Motor Vehicle Expenses

Deducting automobile costs is a very important part of tax planning for many small businesses, one that comes with many rules and restrictions. Generally, any expense incurred to operate a vehicle can be deducted, including: fuel, insurance, maintenance and repairs, interest, lease costs, and more. However, it is important to keep track of all business kilometres driven at the beginning, end, and throughout the year, along with all automotive receipts. Don’t forget to consider the tax implications when choosing which vehicle to purchase, whether to lease or purchase a vehicle, and whether to own your vehicle personally or in a corporation.

You should always consider seeking the advice of an expert to ensure that these tax saving ideas are right for you. 

Published in Huffington Post Canada. (URL: ow.ly/4qfO30f4ktr)

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Daily, Weekly, Monthly: What to do to Maintain Accounting Records for Your Small Business, and Rake in the Benefits!

Often the most time consuming and stressful part of running a small business is the process of keeping clear and accurate financial records. Even those who manage to keep their books organized can find it challenging to use them strategically in their business decision-making. As a result, many small business owners simply throw all of their receipts into a shoe-box and give it to their accountant at tax time, which causes them to miss out on a lot of valuable information about how their business is performing.  

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Maintaining a good record keeping system throughout the year is crucial to ensuring that your small business reaches its full potential. This system can be used in many ways to make business decisions. For example, it can easily determine things like: whether or not you are making any money, how financially strong you are at any given time, and be able predict rough patches before they happen.

Here are some tips for setting up your accounting system so that it can be used year-round as a business decision-making tool, not just for tax season.

Before you start: Choose Your Accounting Software Wisely

If you are just starting out and do not have a lot of transactions then a manual record-keeping system could be a good option for you. It is a low cost option but does require someone (likely yourself) to maintain it regularly. The other disadvantage of this method is that you typically end up spending most of your time on the number crunching, leaving little time to analyse and understand the numbers.

As your small business grows you will want to consider moving to a computer software solution that can handle more transactions efficiently. These programs can provide you with the ability to customize your records to suit your business and the level of detail that you require. They also offer valuable reporting tools that will help you to better understand how your business is performing throughout the year.

Before you start, make sure that you get proper training on how to use the system that you have chosen. These programs can be more complicated to use than people often realize. If the software is not used as intended then the data that comes out of it may be compromised, which can be very time consuming to fix.    

Daily: Maintain Records

As a small business owner, you should be regularly monitoring the progress of your business by updating your accounting records daily. You know the financial condition of your business only when you maintain accurate records. Make it a daily habit to review your bank balances, record all payments made, record all sales/cash receipts, correct any entry errors, and record any inventory sold/purchased. Follow this process daily and find out how easy it can be!

Weekly: Review Accounts Receivable/Payable

A small business can run into major problems if its customers are in the habit of paying their invoices late. To reduce the risk of late or non-payment, you should clearly state your credit terms and conditions on your invoice, along with an interest penalty to be imposed if the payment is past due. In some cases, these precautions may not be enough. It is recommended that you review your accounts receivable on a weekly basis and take action on any slow payers. If your customers know that you are on top of your accounts receivable, they are more likely to pay on time. For the same reason, it is also a good idea to review your accounts payable on a weekly basis to ensure that you stay in good standing with your vendors.

Monthly: Reconcile Your Accounts

An accounting system is only useful to you if the records are complete and maintained accurately. For this reason, it is important to have your financial records reviewed and reconciled monthly against the bank, petty cash, and credit card statements to confirm that all entries have been recorded in the correct accounts. 

Now Reap the Benefits

Once your accounting records have been reconciled, you are then in the position to actually use this vital information to help discover profit opportunities, cost savings and efficiencies.

A clear and accurate Profit & Loss Statement, Balance Sheet, and Statement of Cash Flows hold an abundance of these clues! These reports can be populated right from the accounting system. It is important to review these reports in detail to ensure that you have a thorough understanding of what is happening and if anything unusual needs to be investigated.

You should always consider seeking the advice of an expert to ensure that your accounting systems are designed to suit the specific needs of your business. An expert can review your financial records and uncover tax savings, profit opportunities, and underlying issues that may otherwise go unnoticed.

Published in Medium. (URL: http://ow.ly/k6PG30f8rlD)

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Setting up an Effective Accounting System

Every business needs an effective accounting system. Many business owners overlook the logical method of tracking their revenues and expenses by “profit centers.” A financial reporting system should be set up such that it has the ability to generate reports that provide a breakdown of revenues and expenses by type of service provided or type of product sold.

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Once an effective accounting system is established, it serves as the foundation of your practice, tracking the financial health of a business so it can grow and change as it needs to.

To be effective, there are four basic requirements an accounting system must meet:

– Be simple to use and easy to understand.

 – Maintain relevant and accurate records.

 – Ensure that records are kept current.

 – Keep records that exhibit consistent standards and principles.

As you consider implementing an accounting system, be sure it allows you to perform all these functions to best support your business. A strong financial management system is the cornerstone of any prosperous business. Stonehenge Accounting has successfully set up this software in many small businesses across Toronto, and the yields and benefits have been incredible.

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Important news for Small Businesses impacted by the recent Liberal tax proposals!

As you may have noticed, small business tax planning is currently under siege due to the recently proposed tax changes presented by the Liberal government. Their proposal reads like a manifesto against small business owners with the Liberals accusing them of “getting a better deal than others” and declaring that they are not “paying their fair share of taxes”. Their stated goal is to “close loopholes that are only available to some – often the very wealthy or the highest income earners – at the expense of others.” This rhetoric is rife with misconception and could not be more false.

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Further, I find these proposals surprising in their complexity, pervasiveness, and mean-spiritedness, which in some cases will result in double or retroactive taxation for small businesses. At the very least, these proposals will cause an outright increase in tax for families, professionals, and other business owners.

Here are some of the proposed tax changes that I find most concerning:

INCOME SPRINKLING

The government is trying to limit a business owner’s ability to reduce their family’s tax bill by sprinkling income to family members through salary or dividends. While there were already rules in place to prevent unreasonable salaries from being paid to family members, the government has gone a step further by extending restrictions on children from age 18 to 24. They are also looking to apply this to second generation income (income earned on income), which was not previously the case. If that wasn’t bad enough, the Liberals are also trying to restrict the use of the lifetime capital gains exemption (LCGE) by family members and trusts. Confused yet?

PASSIVE INCOME

Currently, business owners can decide to leave some of their profits in their corporation to invest, rather than paying everything out to themselves. These funds are typically used for reinvesting back into their business, saving for retirement, and many other reasons. The government seems to believe that this practice is offensive and is taking steps to prevent this by proposing a plethora of complex refundable tax rules.

It is unfortunate that the Liberals have chosen to treat small business owners this way. As we know, small businesses are the life-blood of the Canadian economy and hallmarks of our local communities. Owners take a tremendous risk by not only starting their venture but also over time as they re-invest profits back into their businesses to create more jobs and other benefits for the economy.  

The Liberals have given us until October 2, 2017 to respond to their proposals. Tax experts across the country have been urging the government to slow down this process, drop the rhetoric, and do it right through a reasoned discussion. Let’s hope they listen.

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