There are some big misconceptions about incorporations out there that can cost small business owners thousands of extra dollars.
I hope this article will clarify write-offs between corporations and sole proprietorships so you can make better business decisions.
Article Written for TaxWrx by Chartered Professional Accountant Jillian Battaglio.
I regularly have gleeful new business owners sitting in my office convinced that incorporation is the key to better tax write-offs.
Hollywood and the media seem to have made incorporations into magical tax havens.
Stories of huge corporations paying virtually no tax are splashed throughout news headlines and social media feeds.
In reality, write-offs and deductions are virtually the same for either a sole-proprietorship or an incorporated business.
There are very few differences between the two business structures.
Now, there are a couple of key variations. So let's go through these together so you can be a well-informed business owner.
Sole-Proprietorships Can Not Claim Mileage
The first difference is a detractor for sole-proprietorships. They CAN NOT, I repeat, CAN NOT, claim mileage.
I have had so many small business clients providing us kilometres for their tax returns, who end up speechless when we ask for gas, insurance and repair receipts.
A whole year’s worth of vehicle deductions down the drain because they were misinformed about the write-offs they could claim.
Only actual vehicle expenses (gas, repairs, insurance) can be claimed.
Sole proprietorships CAN NOT claim mileage (sorry for yelling).
Please check out our other articles on vehicle expenses if you are claiming vehicle costs and consider subscribing to one of our membership plans so you don’t miss out on tax deductions.
WorkSafe is Cheaper for Sole-Proprietorships
Oftentimes there are carve-outs for business owners’ personal earnings in sole-proprietorships.
This compares to corporations where these exceptions aren’t often in place.
One client of mine had a robust sole-proprietorship in the construction industry. Work Safe was a big concern surrounding their incorporation decision because of the additional costs they’d have to face on shareholder earnings.
As an incorporated business, you, as the business owner, are usually required to pay WorkSafe on your own earnings.
This applies whether you are taking dividends or a salary.
Now, this can add thousands of extra dollars to your WorkSafe bill – especially if you are in an industry with a high danger rating, like construction.
Because of the extra cost. It is worth considering the WorkSafe component before deciding to incorporate.
Bookkeeping Is Harder In A Corporation
Bookkeeping becomes more complex and important in a corporation.
Why? Because the business bank account must be tracked in detail.
How does this impact you?
With an incorporated business – any funds taken for personal use – whether in the form of wages, dividends, or your child’s school supplies can impact your personal income taxes and needs to be tracked.
Yeah... it kind of feels like that.
I’ve seen many, many clients get in trouble with this.
Not understanding the importance of their corporate bank account has landed them with surprise tax bills that can be astronomical.
This has devastating effects and can ruin marriages and close businesses.
One client of mine even had to sell their business just to pay their tax bill.
Many clients assume that being incorporated means lower taxes.
This is not the case if you use all the money in your corporate bank account for personal use.
The perception that write-offs are better in a corporation lands a lot of clients in hot water.
"Hollywood and the media seem to have made incorporations into magical tax havens." – Jillian Battaglio, CPA, CA
There is no greater flexibility with write-offs in a corporate bank account.
Just because it was spent from a corporate bank account doesn’t make it a deductible tax write-off.
Bookkeeping Write-Offs Are Not Better In A Corporation
As we wrap up – let’s go back to our original question. Will your tax write-offs be better in a corporation?
Probably not.
Inventory costs, equipment purchases, and your child’s school supplies all have the same tax treatment in either a sole-proprietorship or an incorporated business.
I hope this article has helped debunk the myth that corporations have better tax write-offs so you can make better business decisions.
If this topic has interested you, be sure to check out our other blog articles and consider subscribing to one of our membership plans so you can be a well-informed business owner.
Article Written for TaxWrx by Chartered Professional Accountant Jillian Battaglio.