If youre like many independent repair shop owners who started off as technicians before taking the reins of the business, you know more about ABS than GAAP. This time of year, however, its worth turning your attention to things like Generally Accepted Accounting Principles. Thats right. Its tax time.
If you’re like many independent repair shop owners who started off as technicians before taking the reins of the business, you know more about ABS than GAAP.
This time of year, however, it’s worth turning your attention to things like Generally Accepted Accounting Principles.
But filing doesn’t have to be stressful. There’s plenty of professional help out there – some of it free – and the more organized you are, the easier it’s going to be.
Here are seven tax tips from Mike Shellnut of Shellnut Professional Accountants in Dartmouth, Nova Scotia. Among his clients are a number of automotive repair shop owners, so he knows a thing or two about our industry and the unique challenges we face.
Taxable benefits is “quite a little monster,” Shellnutt says. It’s an issue that employers have to pay close attention to.
Company cars, in particular, can be tricky, and they’re of special interest to Canada Revenue Agency (CRA).
Any personal use of employer-provided vehicles is considered a taxable benefit and should be reported with income. (And, by the way, personal use includes going to and from work. You can’t claim your commute.)
By the same token, it is not uncommon for an employee of a business – or even a business owner – to use his own vehicle for business purposes without seeking compensation. If employees use their own personal vehicles for work-related purposes, whether it is picking up or delivering parts, or shuttling clients, they’re allowed to deduct expenses related to that use. For the 2011 tax year, the formula is $0.52 per kilometer for the first 5,000 kilometers and $0.46 for every kilometer after that. (In 2012, that went up to $0.53 and $0.47 respectively.) You must keep a detailed log, a sample of which is available at the CRA web site. Compensation back to the owner of the vehicle is not taxable (since they used after-tax dollars to operate the vehicle).
Another potential taxable benefit is a loan from the company at less than the prescribed interest rate. This should be claimed.
And if you decide to use credit card points to go on a holiday, that’s a taxable benefit too. Does anyone claim it? Probably not very often. But it’s a risk people have to think about. And if it happens a lot, you could get caught.
Although many in the industry would still like to see technicians be allowed to write off the cost of their tools, that provision has only been offered to apprentices, and only to a maximum of $500 per year. The tools must be purchased by the apprentice and be for exclusive use in his work. The employer will have to provide a T2200 – a declaration of the conditions of employment. Claiming $500 doesn’t mean they get $500 back. It means they’ll get the tax back on the $500 they spent on tooling up. And, of course, they’ll need their receipts.
Equipment that has a useful life of more than a year is deemed to be capital equipment, so your Capital Cost Allowance (CCA) comes into play here. Remember, only a portion of it can be claimed each year, as depreciation and amortization need to be considered.
“We see that often that someone will spend $20,000 or $30,000 on equipment and they’ll try to expense it, which would create a business loss,” says Shellnutt. “But you can’t do that because that equipment has a useful life long beyond one year. You can’t just take it off the bottom line.”
As useful life goes down, the claim portion changes, and you’ll have to keep track of what you’ve claimed.
When it comes to the cost of educating your workforce, you have to look at the nature of the training to know how to claim it. If you have to train your staff on the use of a new piece of equipment, that becomes part of the capital cost of the equipment. That training is essentially added into the price of the equipment and is amortized over the life of the equipment. If it’s an employer paying for professional development or skills upgrading, it is considered an expense to the business and can be claimed as such.
If the owner has a spouse that is involved in the business, and is capable of doing bookkeeping, there’s an opportunity for a shop owner to hire their spouse. It gives that couple the benefit of income splitting. Rather than the owner earning $100,000 a year which would be taxed in a high tax bracket, both partners can earn $50,000 and pay at a lower tax rate. Any wage you give to your spouse must be of fair market value. You can’t pay someone $50,000 to empty trash bins once a month just because you want to split incomes.
Getting paid through dividends in the company is great, but there are some advantages to putting yourself on the payroll as well, even if it’s just a small salary. “Having yourself on the payroll shows anybody external to your business that the company can sustain you as an employee,” says Shellnutt. “That adds value to the company, particularly when it comes time to sell.”
Plus, you might find that financial institutions are more receptive to you if you’re a salaried employee of the company. Dividend income fluctuates and is subjective, so they like to see a T4 coming through the business, with dividends on top of that.
And when it comes to taking dividends, remember, you cannot do it if you have a retained deficit. You have to have retained earnings.
Probably the biggest incentive to stay organized is the time and cost savings you’ll enjoy when you send your documents to an accountant.
“If you are bringing your files in the proverbial shoe box, it’s going to cost you a lot of money to have an accountant or even a clerk go through those records,” says Shellnutt.
As far as bookkeeping is concerned, it makes sense to have someone on site, organizing the paperwork, day by day, month by month. There is also a strategic benefit to keeping your numbers up to date. If you wait a year to get your results back, there’s no way you’ll be able to respond to problems in the business.
If you’re not computerized and CRA ever gets you in their cross-hairs, you’re going to face an uphill battle proving all your claims. In today’s day and age, hand-written invoices are really unacceptable. In fact, they look suspicious.
Computer software is inexpensive, and easy to learn. And from a standpoint of management control, it offers huge advantages.
Need some automotive shop software for things like invoicing, cost tracking, accounts receivable, accounts payable, and inventory management? You can download a program called “Service Writer Express” for free at www.kinsac.com. It’s basic… but it will get you started.
Needless to say, you should keep records for at least seven year. That’s the general rule of thumb. On personal income, CRA doesn’t go back beyond three years unless they detect fraud and then they can go back as far as they want. Just saying.
These are things for employers to keep in mind as they get ready for tax season. If number crunching does not come naturally to you, it is worth seeking the advice of a professional. Not only can they find all the deductions to which you’re entitled, but if something is not clear, they can get between you and CRA and can help answer questions on your behalf.
Best of all, during the course of the year, they’ll be able to read your numbers and suggest ways of improving your business processes.
You can’t beat the one-two combination of minimizing taxes and maximizing profits!
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