It’s that time of year again: tax time.
If you’re like other entrepreneurs, the next couple of months will be stressful. In fact, studies show that roughly 50% of business owners worry about their taxes each year.
While it’s common, worrying doesn’t have to be a part of your tax time routine. With the right preparation and strategies in place, you can have confidence money will be saved and your taxes will be paid without a hitch.
Here are a few pointers to help you cover all the bases and make sure you are prepared and confident heading into tax time.
Minimize Corporate and Personal Tax Before Tax Time
To ensure you enter tax time with confidence, know what you need to do to minimize your personal and corporate tax.
Conduct a Dividends vs Salary Analysis
Paying yourself via dividends or a salary will affect how much you’re required to pay in taxes.
If you choose to pay yourself a salary or wage you can consider your pay as a company expense. This route lowers the taxable income your company is required to pay. Although, you will have to claim your pay as income. This will subject you to paying more in personal tax and requires you to pay into your CPP. However, paying yourself a salary increases your RRSP contribution room so that you can make RRSP contributions which are tax deductible.
If you choose to pay yourself via dividends, you will be collecting investment income and are taxed more in the company and less on your personal tax return due to personal dividend tax credits. From the business side, you cannot claim dividends as an expense and consider yourself a shareholder rather than an employee.
A primary point to consider when choosing between dividends or salary is retirement. If you do not want to pay into the CPP, dividends are a better choice for you. However, it’s advised you have an alternative retirement plan in place if you take this route.
Use Tax Deferrals When Possible During Tax Time
To help minimize your personal tax, be sure you are contributing to tax-deferred accounts.
Tax deferral accounts do not require you to pay taxes on your contributions until a later date. This means as your money grows in the accounts, you will not have to worry about tax implications.
Incorporate the Shareholder Loan
The shareholder loan is the total owner cash draws from your company minus funds you have contributed. If you’ve contributed more than your cash draws, it will be marked as an asset on your balance sheet. If you have contributed less, it will be considered a liability.
Transactions that affect the shareholder loan include:
- Cash contributions
- Paying for company expenses with a personal credit card
- Cash withdrawals
- Paying for personal expenses with company funds
When you use the shareholder loan, you do not have to pay taxes on the money you withdraw until the end of the fiscal year. If it falls as an asset at the end of the year, you declare it as either dividends or salary. You can incorporate the shareholder loan into your tax plan to minimize tax implications.
Review Your Future Personal Expenses
A key step in crafting a tax plan that helps you minimize your personal taxes as well as your corporate taxes includes planning out future personal expenses. When you do this, you can schedule your spending so that you are getting the most out of your company in the process.
Take Advantage of Deductions and Credits
There are hundreds of deductions and credits business owners can qualify for. To claim your credits and deductions, you’ll need proof you qualify. Meaning you need to keep your business records organized and easily accessible. In some cases, you’ll have to present the proof with your taxes, and in others, you’ll need to keep it on hand in case you’re audited.
Talk With Your Accountant Before Tax Time
Now is the perfect time to ensure you are minimizing your corporate and personal tax. If you’re unsure of how to implement or build a tax plan that includes the above strategies, turn to a trusted accountant.
They’ll:
- Answer questions you have about taxes.
- Proactively ensure you claim every benefit you’re entitled to.
- Help you build a strong tax plan.
- Provide you with a dividends vs. salary analysis
- Incorporate tax-saving strategies into your tax plan.
- Ensure you pay everything you owe, but nothing more.
When you have the right accountant, they’ll not only help you through tax season but also work with you throughout the year to manage your finances and improve your profitability.You didn’t start your business to work non-stop on accounting. If you’re looking for a partner to help with your business finances, it’s time to call Argento CPA, the accounting partner you can trust for financial advice and guidance at tax time and at all times. Set up a meeting with us today!