NEWSLETTER

Greetings!

This monthly Newsletter provides  business,  financial  planning and tax information  to clients and friends of our firm.  Any of the general information  contained in this Newsletter should not be acted upon without first determining  its application  to your specific situation.  Contact our office if you have any questions or concerns.  

We are sorry to say good-bye to Briah Marks, who we are sure many of you have had the pleasure of speaking with when you call the office.  Briah has been with the firm since June, 2011 and will be returning to school to study personal financial planning.  Briah has been a valuable asset to Doxsee & Co., and although we are sorry to see her leave, we wish her all the best with her studies.  

We are pleased to welcome Elice Rajkumar to the firm.  Elice will be replacing Briah, and we are pleased to have her join our team!   

The general rule of thumb for deductible expenses is they must be reasonable and incurred to earn income. Reasonable is often a common sense test. Is the expense a normal type of business expense? Is the amount above average compared to other businesses? Is the expense normally incurred by similar businesses?

Once you pass the "reasonability test" you must make a connection to the income earning process. Will the expense have some benefit to the business, i.e., will it (or could it) produce revenue, lower expenses, protect the business, etc.?

Many expenses are deductible because they clearly relate to the business operation. Here are some of the more common ones:

• Rent paid for buildings or equipment
• Wages and salaries
• Cost of products sold
• Advertising

Other expenses have a mix of personal and business use.  The business portion is deductible:

• Automobiles used for business and personal use
• Home office when used as the main (or only) office for the business 

Still other expenses are clearly business related, but are not deductible due to an income tax rule:

• Life insurance
• One-half of meals and entertainment
• Interest and penalties on income taxes

The last category of expenses are non-deductible.  Here are the most common ones:  

• Personal food, clothing (unless it is a uniform), dry cleaning, nails, hairstyling, etc.
• Personal vacations where no business purpose exists
• Any expenditures for personal assets such as house furniture (unless used exclusively in a home office), boats, cottages, etc.   

It is easy to get confused over what is deductible. We recommend taking an approach that captures expenses in the first three categories. Use an accounting system and record all expenses that relate to the business - both deductible and non-deductible. Segregate those expenses by category type. Your accountant will review the expenses and determine the non-deductible portion. You may find it easier to keep separate records of your home expenses rather than pay them through the business.

In our experience, clients miss expenses due to poor record keeping. They fail to keep receipts, distinguish the business portion of expenses or fail to keep records. Record keeping is often seen as a "pain" for small business owners, but failing to keep good records will cost you...it's a question of when and how much.

Organized records save time and money. A good filing system should be accessible and take up minimum space, even when using a paperless system. Many small businesses and individuals can benefit by a basic system.

The system consists of three folders with files arranged in alphabetic order. Two of the files hold documents produced by transactions - one file for this year, and one file for last year. Transactions include expenses, revenues, equipment purchases and related information. The other file holds permanent information such as insurance policies, financing agreements, wills, etc.

At the end of the year, look at the transactions in last year's file. If you do not need the document for tax purposes or some other special purpose, delete it. Always save the information you need in the permanent file. Start the process over each year.

Payment of taxes is never fun, but most people pay when required. In recent years there has been an increase in unpaid taxes. The deepening recession and its effect on business and personal cash flow is likely the cause.

In many cases, directors of corporations are held personally responsible for amounts owed to CRA.  In very limited circumstances, a director can escape personal financial responsibility.  The rules apply whether you are an inactive or active director.  In some cases, directors who have had no knowledge of the corporation's activities have been held liable.

Think twice if you are asked to be a director of a corporation you do not own. If you are a director of your own corporation, you should do some planning. Try to lessen your family's exposure to the Canada Revenue Agency by having the fewest possible directors. If you expect financial trouble, reduce your personal assets (be careful you do not go offside legally in this area - be sure to see your lawyer).  

July 31, 2012

• Corporate tax installments due