Personal Finance

Side business deduction - TAX

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Deal Addict
Nov 1, 2009
2646 posts
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Side business deduction - TAX

Hey guys. If you are working on a new business, but still at the initial stage - i.e. operating out of the house, NO corporation, and no registered business name yet - is it possible to deduct the expenses from your regular income? Essentially:

Taxable income = regular employment income that you get from your day job - expenses incurred in setting up new business - portion of mortgage interest attributable to the space that is used for work (home office)

Is this accurate?
19 replies
Deal Addict
Jan 30, 2012
1836 posts
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TORONTO
porchemasi wrote: You would be right if you actually setup a small business.... you cant claim expenses until you have a business.....Expenses are things your company incurs to earn revenue... setup your company first it is very easy, you can even pay a company to do it for you.
You are mixing up company with business.

The common forms of business are self-employed (also called sole proprietorship), company and partnership.

If you have a real business, then the business is entitled to deduct business expenses. It's not uncommon for a business to have losses while getting started and establishing itself in the marketplace.

If you are self-employed, then you can apply business losses to other income that you have, which is one reason why self-employment is popular.

BUT, CRA can examine your business and determine that it isn't a real business. CRA can say that you're not really self-employed, you're really an employee, or that your business is just a hobby, disallow all your deductions and assess penalties.

Here's an example: https://secure.globeadvisor.com/servlet ... CESTNICK11

If you would like a better answer as to whether your business is real or not, ask an accountant.
BetCrooks wrote: @Phoenix3434 if you're Canadian, no it's not possible.
Business expenses and capital costs are recovered ONLY against business income, not against personal income.
Wrong.

Here's a statement from a CA: http://whitekennedy.com/tax-tips/tax-tip-self-employed/
Deal Addict
Mar 3, 2009
1913 posts
1221 upvotes
Ottawa, ON
There seems to be a lot of bad information on this thread! M8Rxmjsik is correct here. You can write off a loss against your personal income, however, the loss has to be the result of business activity.

If you get audited, the CRA will require proof that you are starting a business and you have a resonable expectation of profit.

A good example of this is if I were to start to rent out a house, I may have large costs in the first year of business (renovation, advertising, utility bills, etc), but I have the expectation of profit in the future from rent.
Deal Addict
Aug 19, 2013
2397 posts
1091 upvotes
BetCrooks wrote: @Phoenix3434 if you're Canadian, no it's not possible.
Business expenses and capital costs are recovered ONLY against business income, not against personal income.
You can read how to claim business taxes in the CRA brochure http://www.cra-arc.gc.ca/E/pub/tg/t4002/README.html
and there are links to the form etc at http://www.cra-arc.gc.ca/tx/bsnss/tpcs/ ... u-eng.html
This is completely wrong. Yes business losses can offset employment income.

And you do not need a business to be "registered". CRA does not really care. They are just concerned with if you are actually setting up a true business and not a
Hobby. So if you have expenses related to the business in 2014 but don't earn any income you need to able to show that you were actively working at starting things. Not just thinking about it. So say you started really working on it during the end of 2014 but didn't have any sales until the beginning of 2015. You could deduct some expenses for the end of 2014 even if there is no income for that year.
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Feb 19, 2010
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M8Rxmjsik wrote: You are mixing up company with business.

The common forms of business are self-employed (also called sole proprietorship), company and partnership.

If you have a real business, then the business is entitled to deduct business expenses. It's not uncommon for a business to have losses while getting started and establishing itself in the marketplace.

If you are self-employed, then you can apply business losses to other income that you have, which is one reason why self-employment is popular.

BUT, CRA can examine your business and determine that it isn't a real business. CRA can say that you're not really self-employed, you're really an employee, or that your business is just a hobby, disallow all your deductions and assess penalties.

Here's an example: https://secure.globeadvisor.com/servlet ... CESTNICK11

If you would like a better answer as to whether your business is real or not, ask an accountant.



Wrong.

Here's a statement from a CA: http://whitekennedy.com/tax-tips/tax-tip-self-employed/
It's nice to read posts from people who know what the hell they're talking about. This is one of them. Thanks, M8Rxmjsik.
Sr. Member
User avatar
Oct 24, 2011
623 posts
180 upvotes
Timmins
There are four kinds of expenses against business income, all reported on the T2125 http://recherche-search.gc.ca/rGs/s_r?q ... =x#wb-land

Operating expenses are the things you need to buy to actually run your business- examples, office supplies, invoices, printer paper. These are written off directly against business income. If you paid to set up your business in one year, and had income the next year, you would complete the T2125 showing 0 income but some expenses. Be prepared to show CRA a business plan and how you intend to make a profit, should they ask.

Home office expenses- mortgage interest, heat, hydro, property taxes. These are based on the proportion of your home office against the rest of your living area. You must have a separate office set aside dedicated to your business; you cannot do your business on the coffee table while watching TV and call it a home office. These expenses can ONLY be written off against business expenses if there is a profit. In other words, home office expenses cannot create or increase a business loss. They can, however, be carried forward for when you do have a profit.

If you spent money setting up a business and bought larger (capital) items, such as computer, furniture, etc, these would be placed in the CCA schedule and be written off over time.

A fourth expense is vehicle; this is complicated and you must keep track of your mileage for the year- both personal and business. The allowed expenses are then prorated based on the % of business against total mileage.

Yes, if you show a business loss, this loss goes as a negative on your T1 form, and so brings down your net and taxable income. Bear in mind, that continual losses may trigger a red flag with CRA; you must have a reasonable expectation of profit.
Sr. Member
Oct 14, 2012
954 posts
728 upvotes
Woodstock
Sorry. I've misunderstood something and I've retracted my original statement. Sierra112 has clarified correctly what I was saying in error. I've left the links to the T2125 form and brochure, though.
Deal Addict
Nov 1, 2009
2646 posts
81 upvotes
Great, thanks guys for the very useful information.

One more follow up question re: deducting the costs of a vehicle. Is it generally better to lease or buy if it is an expensive car (i.e. around 80K value lets say). Just to take a stab at this, with a lease, the full amount is deductible, but if you purchase, maybe only the interest is deductible - but you can depreciate the car over X years?

Also, is there a limit on how expensive the car can be for the deductions? i.e. if a guy buys a 250K Ferrari saying he needs to visit customers and meetings, is that valid?
Sr. Member
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Oct 24, 2011
623 posts
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Timmins
If you lease, the full amount is not necessarily deductible; there is a limit per month; you would have to figure out the formula from the T2125, vehicle expenses part, then it gets prorated as do the other expenses. If you are paying interest on a car loan, the interest is also prorated. Whether it's better to lease or buy is not cut and dried. You may have to work things out both ways. Personally, I wouldn't tie myself to a lease if the vehicle would only be used 10-15% for business.

See http://www.cra-arc.gc.ca/tx/bsnss/tpcs/ ... u-eng.html for what expenses are allowable

Vehicles go into class 10 if they cost up to $30,000 (before HST) and class 10.1 if over $30,000. The cca rate is the same no matter if you paid 31,000 or 81,000. See http://www.cra-arc.gc.ca/tx/bsnss/tpcs/ ... l-eng.html

Make sure you keep meticulous records if you use your vehicle (log books). That's one area CRA gets sticky.
Deal Addict
Apr 7, 2011
2133 posts
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Hamilton
just to clarify, you can't deduct a business loss against 'employment' income. If you already have business income because you're self employed you could offset the losses against that income.
Deal Addict
Aug 19, 2013
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Sum_guy wrote: just to clarify, you can't deduct a business loss against 'employment' income. If you already have business income because you're self employed you could offset the losses against that income.
Yes you can. The only thing that can't be used to create a loss is business use of home expenses. If not including business use of home you have a loss from a business you can offset any other type of income including employment income.

So say for example in the first year of business someone incurs a $2000 loss because of expenses such vehicle expenses, office supplies, accounting fees, and maybe renting some office space or wharehouse space somewhere, they can use that loss to offset any other income they have.
Deal Fanatic
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Feb 19, 2010
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Sum_guy wrote: just to clarify, you can't deduct a business loss against 'employment' income. If you already have business income because you're self employed you could offset the losses against that income.
It's OK not to participate in the thread if you don't know what you're talking about. This applies to you in this thread.
Deal Addict
Nov 1, 2009
2646 posts
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Thanks guys. Very useful info!
Conquistador wrote: It's OK not to participate in the thread if you don't know what you're talking about. This applies to you in this thread.
LOL.. Almost spilled my drink!
Sr. Member
Nov 5, 2013
624 posts
122 upvotes
Phoenix3434 wrote: Hey guys. If you are working on a new business, but still at the initial stage - i.e. operating out of the house, NO corporation, and no registered business name yet - is it possible to deduct the expenses from your regular income? Essentially:

Taxable income = regular employment income that you get from your day job - expenses incurred in setting up new business - portion of mortgage interest attributable to the space that is used for work (home office)

Is this accurate?
Assume that CRA considers that u have a legit business, with a reasonable expectation of profit because that isnt for sure based on your facts given. Expenses in setting up a new business technically are a capital expenditure (actually eligible capital expenditure per income tax act). Eligible capital expenditures cannot be deducted in full, and are not eligible for capital cost allowance (CCA). They may qualify for a partial deduction called a cumulative eligible capital deduction. When eligible capital property is purchased, in most cases 75% of the cost is recorded in a "cumulative eligible capital (CEC) account". This is an account which tracks, for tax purposes, your eligible capital property acquisitions and dispositions. 7% of the balance of this account can be deducted from income each year.

Income Tax Interpretation Bulletin IT143R3 - Meaning of Eligible Capital Expenditure
http://www.cra-arc.gc.ca/E/pub/tp/it143r3/README.html

Eligible Capital Expenditures - Sole Proprietors and Partnerships
http://www.cra-arc.gc.ca/tx/bsnss/tpcs/ ... u-eng.html
Deal Addict
Nov 1, 2009
2646 posts
81 upvotes
Hey guys. Another follow up question. How carefully does the CRA check with regards to "who" (between the two spouses) paid for the actual item used for setting up the business. Lets say the husband makes more money than the wife in their "day job" (as employees). If the wife pays for an item, even though it is used for their husband's business or their "common" business, will there be an issue in deducting the amount from the husband's regular employment income - assuming it is he who primarily uses it? When I said "paid", I mean it is paid with the wife's credit card - even though the credit card itself is paid from the joint bank account.

We don't have a registered name for the business yet, and there is no business bank account set up yet either. Someone said earlier in the thread that the business does not need to be registered to get the business loss deductions. Is a corporate bank account required however? We will certainly set one up sometime in the near future - but I am just concerned about the previous/current expenses which are coming from our personal accounts/CCs (both mine and the wife's).

Thanks.
Deal Addict
Nov 1, 2009
2646 posts
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Resurrecting a few months old thread that I created.

A follow up question to you guys.. If the "side business" is NOT incorporated, do I need to file a separate tax return for this "non-corporation" side business? I am guessing not. I am guessing only a corporation (which is a SEPARATE legal entity) requires its own tax filing?

Thanks.
Sr. Member
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Oct 24, 2011
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Timmins
Phoenix3434 wrote: Resurrecting a few months old thread that I created.

A follow up question to you guys.. If the "side business" is NOT incorporated, do I need to file a separate tax return for this "non-corporation" side business? I am guessing not. I am guessing only a corporation (which is a SEPARATE legal entity) requires its own tax filing?

Thanks.
It is a sole proprietorship. You would complete a T2125 with your personal tax return, and the net income/loss goes on your return.
Deal Addict
Nov 1, 2009
2646 posts
81 upvotes
Thx. I downloaded Turbotax Home and Business edition. I am presuming it will take care of that for me when I netfile?
Sr. Member
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Oct 24, 2011
623 posts
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Timmins
Phoenix3434 wrote: Thx. I downloaded Turbotax Home and Business edition. I am presuming it will take care of that for me when I netfile?
I am not familiar with Turbo tax but I assume all programs are pretty well the same; you may have to request the T2125 specifically from the program; once it's completed, everything goes on the proper lines automatically.

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