Review of Allowable Expenses for Proprietorships

With the June 15 filing deadline approaching for proprietors, tax and financial advisors to farmers should note that realized farm income amounted to $3.3 billion in 2008, up $1.3 billion (+63.2%) from 2007, according to a Statistics Canada report released May 25. This was the second consecutive annual increase after declines in 2005 and 2006.

This could mean that for some, the taxes due on June 15 may be higher than last year. Should this happen, a variety of planning opportunities including averaging and capital cost allowance provisions may help. Advisors and their clients should confer this week to optimize, and clients should be aware that interest will be charged from May 1st forward if there is a balance due on June 15.

In anticipation of the June 15th deadline, some of the common deductible items that can attract audit attention are:

• Home office expenses
• Auto expenses
• Interest costs
• Wages paid to family members
• Gross margins relating to purchases and inventory
• Personal consumption of tax deductible purchases.

We will review the allowable deductions available when completing a tax return with home office expenses.

Generally, deductions can include:

• supplies used up directly in the work (stationery, maps, etc.);
• salaries paid to an assistant (including spouses or children if Fair Market Value is actually paid for work actually performed);
• office rent or certain home office expenses.

For the self-employed, deductible home workspace expenses include:

• utilities, maintenance and repairs including light bulbs and cleaning supplies;
• rent, insurance, property taxes, mortgage interest;
• Capital Cost Allowance (CCA) (although this is not recommended as the exempt status of the principal residence is then lost on the portion of the home on which CCA is claimed).

You may claim expenses related to the home office space. To qualify, the space must be the place where the individual principally (more than 50% of the time) performs the office or employment duties, or is used exclusively to earn income from the office or employment and, on a regular and continuous basis, for meeting customers or others in the ordinary course of performing the office or employment duties.

Help your clients arrange their affairs within the framework of the law and pay the least taxes possible!

Educational Resources: For more information on preparing tax returns for the self-employed or farmers, register for Tax Preparation for Proprietorships, a certificate course by self study from The Knowledge Bureau.

In this course, students will learn how to complete the income statement using the most recent tax laws and prepare tax returns for:

• self-employed,
• partnerships,
• farmers,
• fishermen, and
• professionals.

For more information on this course and others go to www.knowledgebureau.com/sage. For a free professional development consultation call 1-866-953-4769.