With the end of December approaching and the New Year on the horizon, many businesses have been hard at work starting to plan their corporate budget for 2023. And why not? Being proactive when it comes to your business’s finances is an admirable habit to get into. It’s also a great way of starting the New Year off on the right foot.
What doesn’t always get factored into the New Year budget, however, is your tax plan.
This includes what you’ll have to pay, what deductions you’ll receive, and any tax breaks you may be entitled too. Your tax plan carries financial weight which should always be integrated into your upcoming budget. And, with proper tax preparation, it’s possible to pay less in taxes upfront or receive a larger refund come the end of the year.
Here’s why tax planning should walk hand-in-hand with your budget as you move into the next year.
Clarity on Your Business Type
The type of business that you declare yourself as will influence how much you’re taxed. Owners looking to minimize their tax bill may want to consider becoming an incorporated business in order to offset some of the burden.
A big benefit that comes with incorporating your business is the lower corporate tax rate. Incorporated businesses that claim the small business deduction have a tax rate of 9% while those that don’t have a 15% rate. They can also take advantage of tax benefits that are not provided to unincorporated businesses. This includes capital gains exemptions and income tax splitting.
In comparison, a sole proprietorship or unincorporated business will pay the personal income tax rates on their gross profits. In 2022, personal income is taxed between 15% and 33% depending on your net income. You can find your Alberta tax rates here and your federal tax rates here.
Keep these taxation rates in mind as you move forward with your New Year budget and plan accordingly.
Insight Into Your Deductible Expenses
What expenses you’re expecting in the New Year will contribute to planning your annual budget. It’s important to keep in mind that some of these expenses will either be fully or partially deductible as a business owner. These deductions should be considered as you’re creating your financial budget as it’ll give you more insight into where you can save money and as well as where you can spend it.
Some of the most common deductible expenses for business owners are:
• Business meals
• Work-related travel expenses
• Work-related car use
• Business insurance
• Home office expenses
• Office supplies
• Phone and internet expenses
• Business interest and bank fees
• Professional service fees
• Salaries and benefits
• Charitable contributions
• Educational expenses
• Energy efficiency expenses
• Advertising and promotion
• Client and employee entertainment
• Startup expenses
Factor in the deduction rates that you’re entitled to as you begin next years budget. For a complete list of deductible expenses and their rates, you can visit the Service Canada resource page found here.
More Decisiveness in Hiring Decisions
Tax planning will help you determine if it’s (1) cost-efficient to hire an additional employee and (2) what kind of help you can afford to hire. This may include full-time or part-time workers, freelancers, contractors, or casual labor.
To successfully staff for your needs, you’ll need to compare the financial and economical benefits of bringing on a new hire and compare it to the overall cost of hiring them on. Keep in mind that you’ll need to account for their wage/salary, the cost of training, any required benefits, additional bookkeeping time, payroll tax, and workers’ compensation when you’re doing this.
You’ll also want to make sure that you’re including any federal or provincial employment deductions that you may entitled to, as incorporated businesses can often receive aid to offset the cost of employment.
If you’re confident that your projected financial benefits would amount to more than the cost of a worker, then you’re likely in a good position to hire.
Firm Up Large Donations and/or Purchases
Large purchases and donations can provide business owners with tax breaks that can readily serve them during tax season.
Plan to purchase business capital assets before your business year end. This way, you can claim income tax depreciation of 50% of the capital cost allowance rate in that year. If you buy the asset after the year end, then you’ll have to wait a whole year to claim that deduction.
On the flip side, consider disposing of business property just after your business’s year end. By doing this, you’ll defer income taxes on the capital gain until the following year.
When it comes to making charitable donations, keep in mind that the federal charitable donations tax credit can be up to 33% of the amount you donated. In Alberta, you’ll also receive an addition 21% tax credit on donations over $200 made to an eligible charity.
Pre-planning these big expenditures and making them part of your budget helps to ensure you’re not leaving money on the table come year end.
Need Help Tax Planning for your 2023 Budget? We Can Help!
Your yearly tax plan and budget should be complimentary sides of the same coin, aiding you in minimizing your tax burden and ensuring a positive financial outcome.
With the end of year quickly approaching, let us help you get your business where you want it to be. Talk to one of our Chartered Professionals today. Tax planning and business accounting is what we do, and we’d be happy to talk to you about your financial goals.
