What are the tax deductible expenses for businesses?

As tax season approaches, many Quebec business owners are wondering what expenses are tax deductible. They'll be glad to know that many tax breaks are available for certain expenses incurred to earn business income.

In fact, one of the most common ways for companies to reduce their taxes is to deduct certain expenses from their income. Companies can reduce their tax burden by reducing their reported income.

Want to learn more about deductible expenses? Here are some of the business expenses that qualify for tax deductions and, in some cases, tax credits.

• 1. Insurance
• 2. Accounts receivable
• 3. Transportation expenses
• 4. Supplies
• 5. Office expenses
• 6. Business use of the home
• 7. Business start-up costs
• 8. Travel expenses
• 9. Legal, accounting, management and administrative fees
• 10. Property taxes
• 11. Interest and bank charges
• 12. Rent
• 13. Advertising
• 14. Meals and entertainment
• 15. Salaries, wages and benefits
• 16. Utilities
• 17. Business taxes, membership fees, licenses and dues

Read on to learn more about each of these expense categories.

1 - Insurance

Business owners can deduct the regular commercial insurance premiums they pay to insure equipment and buildings used in their business operations.

Please note that insurance covering a company vehicle does not fall into this category of expenses and must be considered as relating to motor vehicles.

2 - Accounts receivable

A business owner may sometimes include a receivable that will later prove to be uncollectible in their income. In such cases, it is possible to deduct the amount of the debt.

3 – Transportation expenses

When properly compiled and accounted for in a travel log, motor-vehicle expenses incurred for the purpose of earning business income may be deducted against income. There are, however, certain limitations prescribed by law.

For example, the CRA allows an employer to deduct an employee's travel expenses if they do not exceed $0.59 for the first 5,000 kilometers and $0.53 for all additional kilometers (note that the automobile expense allowance rate fluctuates from year to year).

With respect to public transit, an employer may receive tax deductions equal to twice the expense incurred when reimbursing the cost of passes used for the purpose of commuting to work.

4 - Supplies

A business that absolutely must use certain supplies to create goods or provide services can deduct the cost of the supplies from their income. For example, an industrial cleaning company can deduct the purchase of cleaning products.

5 – Office expenses

Business owners can deduct amounts they invest in office supplies, such as pens and paper, from their income. Desks and chairs should not be included in this type of expense, however, as they are considered capital assets.

6 - Business use of the home

Especially in the time of a pandemic, many business owners have decided to work remotely and operate their business from home. In such cases, it is possible to deduct part of the costs for heating, electricity and other expenses.

Business owners who wish to deduct these expenses from their business income should be aware that only a percentage of these expenses can be deducted. Typically, the deductible percentage is equal to the proportion of the building that is used for business purposes. For example, if a home office occupies 15% of the area of a residence, 15% of the expenses can be deducted.

7 - Business start-up costs

Under certain conditions, expenses that preceded the operation of a business may be tax deductible.

8 - Travel expenses

A company can generally deduct 50% of the amounts paid for meals, beverages and entertainment during business trips.

9 - Legal, accounting, management and administrative fees

Legal and accounting fees paid to outside firms for advice, consultation or services are other expenses that can be included in a company's tax return.

Organizations can therefore benefit from tax credits if they need to hire a lawyer to prepare an objection or an appeal and win the case. The fees of an accountant or tax specialist include the preparation of tax returns and GST/QST as well as bookkeeping.

A minor exception is that legal fees paid to finalize the purchase of fixed assets cannot be included in this type of expense. Instead, they must be included in the cost of the asset.

10 - Property taxes

Businesses can deduct from their income the property taxes they paid for the land and building from which they operate. However, it is important to note that the process is different when a business owner uses their home to conduct their business.

11 - Interest and bank charges

Within certain limits, a business owner who has borrowed money to operate or acquire a business can deduct the interest payable on those loans from income.

12 - Rent

A company can deduct the rent of the land and/or the building from which it operates from its income.

13 - Advertising

A company can deduct the amount it spends on advertising from its revenues. This can include radio, TV, newspaper and even web advertising.

14 - Meal and entertainment

Whether it is to solicit or retain clients, companies can spend considerable amounts of money on entertainment expenses. These are expenses incurred by a member of the organization to attend cultural activities or sporting events with potential business partners. These expenses are tax deductible up to 50%.

Food and beverage purchases, whether for entertainment purposes or otherwise, are also 50% tax deductible. Taxes on meals, tips to waiters and entrance fees to certain establishments can be included in the expenses declared by a company.

However, it is important to know that in Quebec, tax deductions for entertainment expenses are limited to an amount ranging from 1.25% to 2% of the company's annual sales.

15 - Salaries, wages and benefits

Businesses with employees can deduct the gross salaries and other benefits (Canada Pension Plan contributions, Employment Insurance premiums, etc.) paid to their employees.

16 - Utilities

Expenses related to the various utilities used by a business in the course of its operations can be deducted from business income. For example, a business owner can deduct telephone, electricity, natural gas and other essential services bills to earn income.

17 - Business taxes, membership fees, licenses and dues

Business taxes, membership fees, licenses and various types of dues are deductible.

Make sure you get the maximum tax deductions

If all of these business expenses are properly compiled and added to a company's tax return, the resulting tax relief can be substantial. Other types of expenses may also be eligible for tax credits.

To learn more about tax deductible business expenses or other ways to reduce your corporate taxes, please feel free to consult T2inc for advice. Our team of corporate tax specialists can help you benefit from the maximum number of deductions.