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WHY SHOE-BOX ACCOUNTING DOESN'T PAY

By Frances McGuckin

Here's some tips for small business owners who are unclear of how some of their expenses are calculated, or for those who try to slide in every expense possible as a tax deduction without really studying the whole picture.

When a tax preparer or accountant is presented with income and expenses from a small or part-time business, they will question certain expenses, however, they are not auditing your books, and it is not their job to do so. Anyone can claim any amount of expenses, but they have to appear legitimate and in line with the type of business, or one day, that phone call from the tax audit department will happen.

Many small businesses use a residential phone line for calls, but include the full cost of the telephone account in their expenses. The residential line rental is not a deductible expenses, only long distance calls made to clients, which should be calculated each month along with the applicable taxes. Excessive telephone bills for a small business with a residential line will no doubt look a little fishy to the tax department.

Then there's the mountains of "promotional" meals claimed by small businesses. These meals shouldn't consist of taking the family out for pizza or Chinese food-each receipt should contain the client's name, and ideally match the appointment time in your Daytimer. I have seen the tax department audit a client's excessive meal claim years ago, and insist on reviewing their appointment book to match each receipt with an appointment. Needless to say, the client was not a happy camper after it was all over. Remember, Revenue Canada has the time and patience to do this tedious auditing, at the taxpayer's expense. They are the Sherlock Holmes of the shoe-boxes.

Use of your home as an office is based on the business usage of the home, based on the total square footage. You should have a specified office area set aside, and keep all receipts for home repairs, all utility, insurance, tax and mortgage interest. Keep the square footage realistic and don't claim an excessive area if you aren't using it for the business.

When the whole picture is put together, you should have a realistic statement of income and expenses that reflect the true cost of running your business-not just a pile of over inflated expenses to reduce your taxable income.

This weekly 'Business Concerns' column is available for Syndication. Please phone or e-mail inquires to contact@smallbizpro.com 

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Frances McGuckin
8092 Southwood Road, Half Moon Bay, BC VON 1Y1
Tel: 604-740-0602 Fax: 604-740-0702

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