How to Claim Business Income and Expenses
One of the best ways to improve your income overall is starting a home business as a sole proprietorship. The good news is that you can take advantage of your expenses and income at tax time. What you spend on your business offsets some of your business income.
Claiming Business Income and Expenses
All business income and expenses are claimed on a T2125 form. You enter your income into “Part 1 – Business Income”. Since you just enter one number for the entire year, you should be keeping track of your income received with QuickBooks or Microsoft Excel.
If you are selling goods, you will need to enter your opening inventory for the year and any purchases of those goods you made throughout the year. These numbers are entered into “Part 4 – Cost Of Goods Sold And Gross Profit”. If you are selling a service or make advertising income, you do not need to complete this section.
The next section, “Part 5 – Net Income (Loss) Before Adjustments”, is where you enter your business related expenses. What expenses can be claimed? The CRA says “certain costs that are reasonable for a particular type of business, and that are incurred for the purposes of earning income. Business expenses can be deducted for tax purposes. Personal, living, or other expenses not related to the business cannot be deducted for tax purposes.”
You can only claim the portion of the expense that is used for business. For example, if half of your internet use is for business, then claim 50 per cent of the ISP fee. Another rule from the CRA is that you can only claim 50 per cent of the cost for meals and entertainment. Understand these rules so that you get what you are entitled to, but don’t overstep.
Claimed business expenses could be almost anything, as long as the expense is incurred to earn income, and related to your home business. Some of the business expenses you can claim on your tax form include:
- advertising
- automobile
- bank charges
- business taxes and licenses
- conference and convention fees
- interest
- insurance
- ISP fees
- membership dues
- meals and entertainment (50 per cent)
- office supplies
- postage and courier
- salaries of employees
- telephone
- travel
The tax advantage here is that while you do claim your income and are taxed on that, you get to claim these expenses against your total income, not just business income. This reduces your overall tax liability for what you have earned.
For example, if your marginal tax rate is 32 per cent and your business income is $1,000, then you will pay an extra $320 of tax. But what if your deductible expenses come to $1,500 for the year? Then you would have tax deduction worth $480. So in this example, you’ll actually get $160 back on your tax return, all because of your business expenses.
There are other situations that you need to be aware of when it comes to home business taxes, including the Capital Cost Allowance rules. You should also make sure that you understand business-use-of-home expenses.
Comments
Many thanks for the tax tips !
All of them are very timely especially it is the fax filing season.
T2125 Part1 – Business Income
Two Partners – If total sales are say 150,000.00. Do they record the full amount on each of their T2125 or do they record as 75,000.00 for each of their T2125?
Let me know if you find an answer for this question Cindy. Thanks. 🙂
Nice tips and very good.
@Cindy – you would record the full amount but also your percentage of the business (partnership). This should be near the top of the form. In this case since you own 50%, you would pay taxes on your share
Is it possible to claim home business expenses if I’m a full-time employee for someone else? I have full time job but do some contract work on my own time from home. This contract work is completely unrelated to my day job. Can I still claim a portion of my rent, phone, internet, heating, etc?
Hi, I work at an employer’s worksite doing office admin work. I was hired as a subcontractor but did not incur home business expenses as all the work was done at the employer site. I had originally filed it as ‘other income’ but CRA reassessed me saying it should have been business income. What expenses can I claim in this case to offset this income?
Hi, I have a home based business where I earn commission on party sales & also sell product from my home stock & at tradeshows. I need to know do I claim all my stock purchase expenses for 2015 taxes in that year regardless of whether I sell all of those products in 2015. So basically do I use all my 2015 purchased stock as an expense in 2015 or do I only claim an expense for the products that I actually sold in 2015 from my stock and that I can’t write off the expense on the rest of the stock until I sell those items in future years?
Thank you for sharing your wealth of information and tax tips. I have yet to find information or an example of how to complete the T2125 for a “Homestay” business. I host 3 international students in my 4 bedroom home. In addition to room and board, I provide the students with a complete family experience. For example, they join me in family activities, travelling, attending cultural events, occasionally dining in restaurants, etc., all of which are paid for by me (using the fee that I receive from their agency.) Can you provide some information on how to complete Part 5 and Part 8. I’m confused about how to calculate the expenses. Any tip or information you can provide would be greatly appreciated.
I was in a car accident early 2016. I had just purchased $14,000.00 of jewelry inventory which I held for almost a year as I was badly injured. Can I write off the interest on holding the inventory? Thank you