“This was a great business meeting!”
“Absolutely! Great coffee too. A little pricey, though.”
“That’s okay; it’s business deductible.”
“Are you sure about that? The CRA reassessed me last year. I’m not taking any chances this time.”
“You know what? I have a great accountant. They explained everything to me.”
Should you call that cup of coffee a business or a personal expense? It is a very important decision that small business owners regularly have to make. Many business owners often use snap judgment without reviewing the rules. Choices made can have a large impact when they come under Canada Revenue Agency (CRA) scrutiny. The CRA has specific guidelines that businesses should consider when making these decisions.
Business Expenses
The most important criterion is whether the expense was incurred to earn income for the business. This is a very straightforward way of deciding if it’s a business expense. The logic is that expenditure is vital to business activities. Seems simple enough, right?
Personal Expenses
What may seem like a personal expense for one business owner could very well be a valid business expense for another. For example, if I meet some friends for coffee on my way to work, not really deductible. But a coffee shop owner entertaining potential business partners may be able to deduct the same type of costs. It is about the context of the expense, not the expense itself.
CRA Rules
Don’t claim everything and hope CRA doesn’t look. During a review or audit, the CRA will review the general ledger and ask why unusual expenses were claimed. Failure to provide an acceptable answer will often result in the CRA digging deeper into the books and may result in an unfavourable outcome.
Separate and Categorize Expenses
The importance of separating business and personal expenses appropriately cannot be overstated. Categorizing business expenses and using categories relevant to your business is a must. Business owners will minimize their risks if they use the criteria mentioned above. If the CRA investigates and finds a large volume of personal expenses, the business owner could have to pay back the deductions plus penalties and interest. Other legal consequences, including further audits of the shareholders, will also be on the table.
Getting sound financial advice regarding your business expenses is always worth the money. Professional advice should be sought if there is any question about whether it’s a business expense. If this is the case, your dedicated professionals at KATA Accounting Solutions PC have all the answers you need.