Deducting Accounting and Tax Preparation Fees

Let's be perfectly clear - no matter what your political affiliations might be we can all agree that we hate paying taxes.

Whether it is your personal income or your businesses income, writing out that tax check can be extremely painful. That's why we look for ways to reduce them, especially deductions. Anything to lessen the tax burden is a good thing but what about getting those tax returns ready in the first place?

With tax codes being what they are, it's not easy to make sense of all the rules and regulations.

That's why we need a little accounting help every now and then. Can you deduct those tax preparation fees? The short answer is "Yes." But as with anything to do with the government, there is always a "catch."

Tax Preparation Deduction for the Business Owner

As the owner of a business you are eligible to deduct your accounting fees and tax preparation fees as a typical cost of doing business. Look for T2125 Statement of Business Activities and Line 8860.

This would be the fascinating "Legal, Accounting and other Professional Fees" category on your tax return. From the CRA tax code itself comes this official eligibility requirement:

"1. Except where there is a specific provision in the Act dealing with legal or accounting fees…, legal and accounting fees are deductible only to the extent that they:

(a) are incurred for the purpose of gaining or producing income from a business or property, and

(b) are not outlays of a capital nature."

Make sense?

Here's the translation: If you paid those fees in order to make more money for your business then they are deductable. How can there be any other reason for accounting but to make money? That would be with personal income situations. As far as the government is concerned, the T2125 form is just one piece of the total tax return puzzle. The rest of your personal income tax return has nothing to do with making money for your business therefore any money spent preparing those returns aren't deductable.

The Work Around

Yes, you would have to separate the accounting fees even if you're using the same accountant but your accountant should know this. One way around this deduction is for your accountant to assess 100% of their fees for your business returns. Then they would do your personal returns for "free." Who can blame them for spending all the time and effort on the business returns?

DIY Tax Returns

If you prepare your own taxes then you might be able to deduct the cost of software as part of the office expenses on the T2125 form. Again, this is only for business owners. As a regular employee who does their own taxes, you won't be able to make the deduction.


Another great reason for starting a business: More tax breaks!

Ways to Save On Startup Legal Fees

If you're starting up a business there will come a time when a good lawyer will be your best friend. However, that doesn't mean you need to utilize their bill-by-the-minute services for every legal decision you make. There are ways to avoid legal fees. Consider these options:

Go Boilerplate

If you've ever signed a renter's agreement for an apartment you were probably using a boilerplate contract. This is a template agreement already drawn up by a lawyer and is readily accepted by both sides. You might find that many of business contracts can use boilerplates that are available for free on many online legal resources sites. These contracts can include:

• Commercial building lease agreements
• Employee contracts
• Vendor agreements
• Non-disclosure agreements

Just because you're using a boilerplate contract doesn't mean you can't put in your own terms, dates and names. That's what these contracts were created for. Here's a dirty little secret: You know that expensive lawyer you hire to write up your contracts? They use the same boilerplates. You didn't think they wrote every word of a new contract did you?

Ask For a Fixed Fee

Much like the boilerplate contracts, there are also boilerplate services. Filing for a trademark or setting up a corporation are pretty much routine. The only changes that are made are the names in each of the contracts.

Does this mean you should be paying a lawyer by the hour to get those papers in order?

Not at all.

Ask around and see if you can find a lawyer to handle those kind of for a fixed fee. That means whether it takes them two or 20 hours it will only cost you one price

.

You could also offer stock options in exchange for legal services. The caution with that is giving away too much for the kind of "simple work" mentioned above. Your new investors might not be happy about that.

And, if you want to avoid hiring a lawyer for basic corporate services, consider using a document filing service (like CorporationCentre.ca!) to submit your paperwork at a much smaller fee than a lawyer may charge.

Part-Time Lawyer

You might find that after your initial start-up filings you don't need a lawyer all that much. However, you're now stuck paying a hefty monthly retainer to a law firm. Not a wise move.

Instead, look for a firm that can provide you with a part-time attorney. This is someone you can talk to once a week for a reduced fee. Save up your questions and make that weekly meeting count. You can also look into legal insurance. You pay a small premium in exchange for getting a lawyer only when you need them. That's a lot less than the big retainer fee.

If you should ever come across a complicated issue with taxes or find yourself being sued then you don't want to turn that into a DIY legal matter. Get a good lawyer on your side. For everything else, look for flexible options from your legal firm.

Overnight Success Doesn't Happen Overnight

The business marketplace is littered with so-called "overnight success" stories. Because we live in a microwave society, we want everything fast.

We want to lose weight in a weekend by taking a pill. We want to download everything in a blink of an eye. And we certainly don't want to wait for success.

Here are some truths about the overnight success phenomenon that you should think about the next time you hear one of these stories.

It is the exception, not the rule.

Do you seethe with envy every time you read about an overnight success story? One of the most popular is how Roxio, the makers of the app sensation Angry Birds went from zero to hero overnight.

Yes, it was a great success story and they probably never have to develop another game (but they will). However, the truth is Angry Birds was the 53rd game that this company created. That would be 52 other games that went through development, testing, marketing, implementation and lackluster sales.

Overnight success? Hardly.

Sure, a company can get fast results and see their profits soar in a short amount of time, but for the majority of businesses success can't be rushed.

You're hearing the hype.

It looks good for a company to promote themselves as an overnight sensation because we all like a winning story. It also makes for good press to have the Cinderella syndrome play out of someone being plucked from obscurity and plopped down in their dream life.

However, a little digging will reveal the truth behind the hype. Even the simple act of filing corporation papers takes time.

The reality is that a company's success is often built on a lot of past failures. Those failures might not all be related to that company but you can bet the board of director, the developers and the sales staff have had years of experience in the business world that lead them to this point in their careers.

In fact, if someone has worked for just five years prior to starting that company, they are bringing close to 10,000 hours of experience. So, any time you hear a story about an overnight success just ask yourself, "What are they leaving out?"

Being number one could blow up your company.

Under the heading "be careful what you wish for" comes the notion that a true overnight success might actually blow up your company. Imagine the potential success of a Super Bowl commercial.

Not only will literally a hundred million people see that spot play out but it could also go viral, bringing in millions of more viewers. If that business isn't ready for the onslaught of potential customers then their website could crash, their staff will revolt and they'll lose a lot of business.

Planning for success is just that: "planning."

That should mean being ready when it finally arrives.

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Tips for Small Business Owners and Startup Founders

Having a terrific idea for a business is only the beginning. Getting that idea from the "drawing board" to production is going to be a long and challenging journey.

The good news is that there are many resources and experienced folks standing by to help in your endeavor. The moment you embrace the simple fact that you’re not on your own, the better off you'll be. Here are some other helpful tips for small business owners and startup founders:

Bank Working Capital

You're going to need money for your startup. There's no way around that. Beyond lining up investors to back your business plan, you also should have some capital in the bank. This might not necessarily be for your business, but for your personal expenses. There will come a time in the initial phase of your start up when you're transitioning from a salaried position to entrepreneur. In other words, you're not going to have a steady paycheck, but you still need to pay the bills. A good starting point would be to have savings for at least four to six months of personal expenses. A decent size savings account will also let you float loans to your company to cover a wide range of expenses.

Start Small but Aim Big

Every great business owner has a story about humble beginnings. This is when a handful of employees worked together in "low rent" conditions to get things going. Although you know how big you'd like your business to become, it is not going to start out that way. Start small, working out of a space that won't cost you a lot of money. Your current home, apartment or parent's garage is as good a place as any. You also don't want to hire staff unless you've got a lot of work for them to do and all of that work should be generating income. The goal is to ramp up towards success.

Keep Records of Everything

No matter what, where or how you spend money for your business, there should be a receipt for that. You want to make sure you're keeping clean records of all of your expenditures and income. At the same time you also want to protect you personal assets. This is why it is important to incorporate your business and begin to run all your expenses through that entity. It's not a lot of money to set up a corporation and it will certainly pay for itself many times over.

Get a Plan of Action

You need a business plan. This can be a multi-page document or a graphic laden power point presentation. Either way it will become your road map towards success. That doesn't mean you have to strictly adhere to that business plan. You're going to make adjustments all along the way. However, with a well thought out business plan you'll be able to appreciate the trajectory of your business. That is also something your investors are going to embrace.

How to Pay Yourself as a Business Owner

You've worked hard to start your business and are certainly entitled to a paycheck. The question then becomes how best to pay yourself as a business owner. You essentially have two options: salary or dividends.

There are pros and cons with each method.

The best course of action will depend on your personal and business finances. Here are the factors to consider:

Paying Yourself a Salary

When your business pays you a salary it is considered personal income which means you'll have the opportunity to contribute to the Register Retirement Savings Plan (RRSP) and the Canada Pension Plan (CPP). How much you put into the RRSP is up to you.

However, there are maximum contribution limits. The CPP is an automatic deduction which can set up for a nice retirement fund.

In other words, the longer your work and pay into the CPP the more of a "nest egg" you'll have upon retirement.

With regard to taxes, when you pay yourself a salary, the corporation can deduct it as a business expense. On the other hand, as personal income, it is subject to taxes.

How big do you want your tax burden to be? That could determine whether or not you pay yourself a salary. 

Taking payment as a salary means you have to set up a payroll account through the Canada Revenue Agency. This means filling out T4 slips and the rest of the required paperwork. Another tax issue with a salary is that you won't be able to mitigate a business loss if your profits go up and down over the course of several years.

Paying Yourself Dividends

You'll have more cash on hand with dividend payments because they are taxed at a lower rate and don't have any automatic deductions taken out for the CPP. It's also very easy to pay yourself in dividends. Just write a check and square it up with the accounting.

By taking dividend payments you are essentially saying you'll be handling your own retirement. Not only would your CPP be less but you are prohibited from making contributions into an RRSP. If you take dividend payments you could also be precluded from taking additional tax deductions such as childcare expenses.

Overall you need to consider your company's cash flow needs, not only for current business, but also down the road. A qualified financial planner should be able to look at your business and help you make a decision that will provide you and your business with a decent level of financial security.

Starting Your Business with a Clean Slate

Breaking up is hard to do. That's true for relationships and also for ending your contract with an employer.

Whether you're moving on to start your own business or have been hired at a company that could be considered a competitor, you'll want to make sure you can start your new job with a clean slate.

A lot of the following issues might be covered in your employee contract. It's worth discussing with an experienced lawyer to make sure you can get up and running without a potential lawsuit slowing you down. 

Here's what to look out for:

Intellectual Property

It is obvious that anything you created or invented during work hours for your company is owned by that company. This would be considered intellectual property. Where it gets fuzzy is any work you did on the side during off hours. Things could be further complicated if you used any type of company equipment like a computer or software for your own inventions. There could be a strong claim for that property you created.

Non-Competition

It stands to reason that if you're good at your current job, then your start-up would be related to your skill set. That might be cause for concern if you are going to be in direct competition with your current employer. Most contracts have a non-compete clause that can last up to a year. It might take that long to line up your investors and launch your business but you'll you might be restricted from doing any kind of work that is deemed "the competition." Worst-case scenario, you sit out the year and spend it planning.

Non-Solicitation

This is often referred to as the "poaching clause." Just because you've created solid working relationships with a lot of clients doesn't mean you can "steal" them all for your new business. It's a tricky area. A client can go to any business they want as long as they don't violate a contract. The mere fact that you're starting up on your own might be enough incentive for the client to jump ship. From a legal standpoint you'll be covered if you don't actively solicit that client.

If you have doubts about any of these areas then you'll be better off checking with a lawyer. Additionally, you should consider your future plans when accepting any job. If your goal is to become your own boss then a restrictive employee contract which prevents that from happening might not be worth signing.

There is nothing wrong with negotiating. Just make sure you're not getting trapped into a contract which will stop you from pursuing your dreams.

Top Items That May Trigger an Audit of Your Business

If there is one thing that is worse than paying taxes it is getting audited for not paying taxes. A notice from the CRA can send a chill down your spine and have your stomach doing flip-flops. Hopefully, you'll never have to be exposed to that anxiety inducing type of situation. While there is no hundred percent guarantee that your business will forever be spared an audit, there are some proactive steps you can take to avoid that process.

Here are the top triggers for a possible CRA tax audit:

Trigger #1: Mixing Business and Personal Expenses

When it comes to your business accounts and personal expenses, it is best to keep them separate. You should already be filing individual tax returns along with your business returns. Therefore it's not a stretch to keep those items separate. In the real world, the lines between what you spend for your business and your personal life can get blurred. Try to keep them in focus for the purpose of your tax returns.

Trigger #2: Paying Your Living Expenses Out of Business Profits

This is related to "trigger #1." As far as the CRA is concerned you're an employee of your company on par with all the other employees. As a result of that employment you should be getting a salary. Out of that salary you pay for your living expenses. You can't pay your mortgage out of your business profits.

Trigger #3: Failing to Make Payroll Deductions

Sometimes we employ our family members and friends to help with our start up business. There is nothing wrong with that but that doesn't mean those employees can skate on the payroll deductions. You need to treat every employee the same and that means keeping accurate records of payments and deductions.

Trigger #4: Cross Border Taxes

If you do business in the U.S. then their IRS agency will be looking over your shoulder along with the CRA to make sure everyone is getting their fair share of taxes.

Trigger #5: Invoicing Amounts Greater Than $30,000 Annually

$30,000 is the threshold that will trigger the need to register and file HST/GST/PST. If you overlook those filings you can anticipate an audit.

Trigger #6: Multiple Businesses

Your goal should be to expand your business into different regions but that can be complicated with the variant tax codes. The way around that is to set up separate companies that are region specific. That makes smart business sense but it can also draw attention from the CRA who want to make sure all those regions are being paid.

Trigger #7: Being a Success

It might seem odd that success would trigger an audit but the more personal income you accumulate the more it is thought that you'll be trying to shelter that income from taxes. The CRA is always watching!

The most important thing you can do is keep accurate records and follow the rules. That way if you are called in for a routine audit you'll have your defenses ready.

Losing a Valuable Employee

What happens when a valuable employee resigns? First, don't panic.

After all, how many times have you moved from job to job? This is not an uncommon occurrence. Now that you're the boss you can't just throw a going away party and wish that person well.

There are certain steps you need to go through to make sure this is a smooth transition and everyone is on the same page.

Step 1: The Exit Interview

There should be no hard feelings when an employee resigns, especially if they are moving on to a different opportunity or opting to spend more time with their family. Just as you would with a client or vendor, you don't want to burn a bridge with a good employee. Who knows where they will land or if you might need them to consult for your company. If it is a situation where you know a competitor has made them an offer they can't refuse (and you can't match) let them know you appreciate their work.

Step 2: Recall the Non-disclosure Agreement

Hopefully, every employee working for your company signed a non-disclosure agreement before starting work. As they are leaving, it is a good time to remind them of their obligations under this contract. Technically, if they signed the agreement you don't have to remind them because it is legally binding. Just make sure they have a copy before they head out.

Step 3: Let the Company Know

When a valuable member of your team has decided to move on it won't be a secret for long. You still want to get out in front of the news by making some sort of official statement to the rest of the company either in an email, memo or announcement. Hopefully, there will be an opportunity for your former employee to train the new hire. You can also have that going away party to allow everyone a moment of closure. Then it's back to business.

Step 4: Ask For a Written Duty Log

The employee who is leaving might have taken on tasks you're not even aware of. It will be a big help if they were to write down all of their tasks and responsibilities. This is a document they can hand off to the person taking their place. This log should include all the usernames, passwords, email accounts and other company online access issues. This is another reason why you don't want to make this resignation awkward: You still need that employee's help!

Step 5: Call Up a Recruiter

You should know exactly how much time you have to fill the position. This doesn't mean you need to rush to find that new person. Put a recruiter to work to find the best candidate. Perhaps your old employee might even have a recommendation. If they aren't moving to another job, you can also leave the door open for future freelance work.

No matter how important this person was to your business, it's not the end of the world when they leave. You'll press on and might just find that a new member of the team is just the shot in the arm your company needs to take it to the next level.