December can be an expensive time of year for business owners. Whether it is end-of-the-year spending for tax reasons, holiday parties, bonuses, or client appreciation gifts, the costs can add up quickly.
In order to keep the spending on track, Jonathan Carter, CPA, CMA of Kata Accounting Solutions PC recommends that a budget is set ahead of time and adhering to it. “Just because you set a budget does not mean that you need to use the whole thing,” he advises.
Business Finance 101: Spending money to save on taxes is not a good plan
Some businesses decide to make large purchases at the end of the fiscal year in order to reduce their tax load, but Jonathan does not generally advise businesses to spend money in order to get a tax break. It just doesn’t add up.
He explains, “There are several problems with this. If what you’re buying is an asset, you’ll be using a significant amount of cash, but the tax deduction will be taken over time and you’ll still have a tax bill. Even if what you’re buying is an expense, you’re saving pennies while spending dollars. Why spend a dollar to save thirty cents?”
Holiday bonuses, rewards, and gifts
Holiday bonuses, rewards and gifts are appreciated by their receiver, but business owners should make sure that they are being properly accounted for. Sometimes businesses can incorrectly account for bonuses, rewards, and/or gifts which can cause negative tax implications down the road.
In order for bonus recipients to avoid an unwelcome tax bill, properly on the business’ end. “It’s important to make sure that bonuses are run through your payroll system correctly to ensure that source deductions are appropriately accounted for,” says Jonathan.
It is also important to differentiate between gifts and rewards. Non-cash gifts that fall under the annual limit of $500 are not taxable benefits. They are generally tied to special occasions. Gifts that are tied to performance are actually considered to be rewards and are always taxable regardless of whether or not they are cash.
Gifts to team members or clients always need to be accounted for. “You need to be able to show the CRA who the gift was delivered to and to provide their contact information,” says Jonathan. “Something many business owners try to get away with is buying a lot of gift cards and saying they are gifts, but not tracking where they go, and keeping several to use themselves.”
He adds, “CRA has caught on and this can be an area where business owners find themselves in hot water.”
The bottom line is to plan and budget for the holiday season. Make sure that your business is prepared and spend within reason. “It is ok to be generous, but not if it will put your business operations at risk,” says Jonathan.
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