What Are the Tax Deductions for the Self-Employed?

If you are self-employed, whether full-time or earning additional income on the side, you are allowed to deduct a number of business expenses, as detailed by the Income Tax Act (ITA). These deductions serve to offset your net income and thus reduce the amount of taxes owing.

The items allowable for deductions are limited. It is the duty of the Canadian Revenue Agency to determine whether or not given expenses relate to earning your income, and whether or not they can be deducted.

Here are some of the deductions that you may be able to claim.

Office and Home Office

Often it is the home office that people think of when discussing self-employment and the deduction of expenses. However, you are also able to make deductions for an out-of-home office. You can claim the rent and related costs of a rented office.

If you do have a home office, you can deduct its cost upon determining the size of your office as a percentage of your home’s total space. For example, let us say that your home is 200 square meters. If your home office occupies 20 square meters, that would be 10% of your entire home. Accordingly, you would be able to claim 10% of your rent or mortgage interest, as well as other related costs such as utilities, repairs, and security monitoring fees. These will be part of your self-employment income tax return (T2125).

Operating Expenses

Your business requires you to spend money on various expenses which can be claimed on your income tax as a deduction. Some of these expenses will include:

• Start-up costs (as well as interest and fees on borrowed money)
• Office supplies
• Legal and accounting fees, as well as other appropriate professional fees
• Phone, mobile phone, and internet (when used for business purposes)
• Utilities
• Advertising
• Shipping and delivery costs

Travel Expenses and Entertainment

During the course of doing business, you may attend conventions or other events related to your business. In these cases, you can deduct all of your travel expenses. This includes conference fees, hotel costs, and even public transportation fees. You can also claim deductions on 50% of your meal and entertainment costs.

Vehicle Expenses

In the event that you have a vehicle used exclusively for business matters, you will be able to deduct related expenses, such as fuel, insurance, and repairs. If you also use your vehicle for personal matters, you will need to determine what percentage of use is related to business. That will be the percentage that you will be able to deduct.

In order to accurately track your expenses, it is advisable to keep a logbook with your mileage and other relevant information. It may also be useful to keep a calendar to help relate the information within your logbook to actual meetings and clients.

Frequently Overlooked Expenses

There are a number of small business expenses that are forgotten or overlooked, and cumulatively, they can represent a significant effect on your taxes owing.  These can include such things as bank fees for your business bank account, annual fees for commercial or trade organizations, private health plan premiums for yourself or employees, and more. Even such things as cleaning supplies for your home office should be considered. When you include enough of even the smallest deductions, the savings on your taxes owing can be considerable.

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