Tax Strategies: Navigating the Complex World of Taxes with Expert Guidance

Let's talk about tax strategies and when you should be working with a tax professional. We all know that the tax situation is getting more and more complicated every single year. Whether you're in the United States or you're in Canada, they continue to create new rules, new tax credits that are going to be available for individuals and for businesses. The challenge is making sure that we continue to keep up on all of these. If you have anything that's out of the normal, just payroll expenses or inputting employment income on your tax return, you likely want to work with a tax professional. And here's why. We, as tax professionals are always up to date on all eligibility that you are able to get access to, and we want to make sure that that is our job and we maximize those deductions for you. So really, if you're outside of just being an employee somewhere and that's your tax filing, you, you should be seeking additional tax help from a tax professional. Not just someone who says they do this, but someone who's actually got the experience and the education to be able to supply you with the best outcome. At least when you're working with a tax professional, you know, you can sleep at night knowing that everything was maximized and full deductibility was taken. And however it's filed, you should feel confident that, that it's done right. Let's talk about the importance of tax strategies for small business owners. So many businesses, in fact, I worked with Tony Robbins and we did an assessment over thousands of business owners that attended his Business mastery event. And 92% of businesses were paying more tax than they legally had to. As a small business owner, it's so important we work so hard to start creating a business from scratch. We start building it up. We're hiring team members. We can't afford to pay the government any more money than they're entitled to. So we need to make sure that our tax deductibility is being maximized. Because if 92% of business owners were paying more tax than they legally had to do, you think you're one of them? I want to make sure that you're part of that 8%. I do not want to make sure that we have any wasted resources going to the government when they shouldn't be. Those resources should be reinvested back into your business. So let's make sure you're paying the least amount of tax legally possible. One of the most common mistakes that are made in small businesses related to taxes is not having up to date and accurate information as far as Bookkeeping goes really, the taxes and the financial statements that are built at the end of the year are based on the quality of the bookkeeping throughout the year. Yes, accountants and tax advisors make adjustments at the end of the year to make sure we're maximizing deductions, but the foundation is really on the bookkeeping. So one, if it's not up to date, going back and finding answers to questions or understanding what expenses were because they were ignored for the last 12 months is not a great approach to your business and to maximizing your tax deductibility. We want to make sure that all of that information is up to date and accurate. Because if it's up to date and accurate and that information is available, we can start planning out how we maximize the tax deductibility and, and keep your taxes as low as possible. So up to date information is really the foundation of a good tax plan. Making sure that we have the right information at our fingertips allows us as business advisors and as small business owners to make sure that we're not missing any deductions that we could take to save us tax money. When we're thinking of tax strategies inside our business, one area that starts to group and get a little muddy for us is when we're mixing together our business and our personal expenses. We need to make absolutely certain that we have a divided line of business and personal expenses. When we have a credit card, for example, that we're using for both personal and business expenses, the likelihood of missing a deductibility because it's deemed personal is very, very high. Whereas if you have a credit card that's dedicated only to business related items, all of those expenses get put through and our deductions are maximized. So when there's a mixed muddy water of personal and business related financial items, the idea is that we lose deductibility because not all expenses are captured. If you have a divided line personal and business, we can ensure the maximum deduction related to those expenses. When we're talking about tax planning strategies for a small business, one of the challenges that I see is that people avoid taxes and the tax liability throughout the year. And what we should be doing in our business is we should be focusing on reflecting on the profitability, the performance of the company. If I'm making $10,000 this month, there will be a tax liability that will come out of this at the end of the year. I want to be prepared and I want to proactively plan for this. So as a small business owner, you should be reviewing your Financial information, you should be estimating what your tax liability looks like. Let's say it's 15 to 20%. And on that $10,000, I'm going to owe 1500 to $2,000 at the end of the year related to that month's performance. If we're not estimating that, you get a surprise at the end of the year, and if it's 40 or $50,000 or maybe even $100,000 in taxes owing, that could be a surprise that you weren't expecting. And it could be a way that it puts your business in financial jeopardy because your cash flow isn't strong enough to support it at that time. So make sure you're understanding what your tax liability is as you go throughout your year so you can properly pan for the cash related to that tax expense and you don't have any unknown liabilities in your business. Ignoring tax deadlines is one of the worst strategies that you could possibly apply in your business. I see it all the time. Businesses come in and work with us, and they've been missing their sales tax filing. They miss their payroll liabilities filing, they miss their corporate or personal tax filing. All this does is it incurs penalties related to those filings, and they can be quite substantial, including failure to file penalties or misrepresentation. You could be looking at getting yourself in a lot of trouble. Instead, even if you can't afford to pay the tax liability that's owing, we want to make sure that everything gets filed on time. We, we may owe interest related to not being able to pay that debt at the current time, but at least we're not incurring penalties for failure to file or missing any of those deadlines. Those penalties can end up being way more expensive than any professional fees that you would incur to get it done on time. In fact, the proactive way to do this is to get a bookkeeper and an accounting firm in place to make sure all of your filings are done regularly on time. Give you the transparency over what's going on in your business, and you'll avoid all those interests and penalties associated with those filings, and your business will be in a much better position. Plus, you're supported by the professionals that are in the bookkeeping and accounting team. So let's talk about tax minimization strategies. The greatest tax minimization and proactive plan you can put in place is making sure your business structure is correct for you. So there's a few options. We have a sole proprietorship, which essentially operates a business where I am the business and I file the business taxes on my personal tax return. Those tax rates across North America can get upwards of 50% on that income. That's not a great outcome for us. When we look at the small business taxes and using a corporate structure, in Canada, you're at somewhere around 12 to 15%. In the United States, with a C corporation, you're looking at somewhere around 20%. If your personal marginal tax rates are higher than 20% or in Canada, 12 to 15%, you should be using a different structure than a sole proprietorship or a partnership. Very important to get this structural piece right. This could be the number one way to save tax money for you and your business. Let's talk tax minimization strategies. So one of the best tax minimization strategies is to ensure that your compensation strategy is the right one for you. There's really two ways. As a business owner, you can get paid. You can get paid as a dividend as a shareholder, which allows you to pull money out. The company pays tax and you pull this out as an after tax distribution. Tax rates are nice and low. Or you can put yourself on salary, payroll, and the business gets a deduction for it, but you pay higher personal tax rates. In fact, depending on where you live, you're likely paying on payroll source deductions. Payroll, payroll remittances, pension contributions for the government. There's a lot more tax liabilities that come up when you're paying yourself a salary. So we want to look at the difference between a salary and a dividend compensation plan for you to make sure that you're getting your money out as efficient as possible. You're paying the least amount of combined tax and you're maximizing your wealth throughout the journey. So compensation strategy is so very important. If you get it right, you're going to put more money in your pocket and save a lot of tax. So from a tax minimization strategy, one thing that we want to make sure that you're capturing in your business is a home office expense. Now, there's different rules related to home office expense. You're supposed to be regularly conducting business there. You have meetings there. In the new Zoom technology, a lot of us are having Zoom meetings at home, whether it's on our phone or on our computer anyway. So we want to make sure that we're maximizing the deductibility of our home office expense, which will allow us to essentially pull money from our company tax free and get a full deduction for those home office expenses in our business, saving US Tax money. So it's a great strategy. We don't want to miss out on those opportunities. Another great tax minimization strategy inside your business is looking at your vehicle expenses. Now, one of the ways, I guess there's a few options for you to capture your vehicle expenses inside your business. The one is buying a vehicle in your business and expensing all of those related expenses. Now, if you're not using this vehicle exclusively for business use, this becomes a little bit of a challenging strategy. Because if we're not exclusively using it for business use, there's a personal taxable element of using a business asset that isn't very favorable to us personally. We end up paying a lot of tax on the original value of the vehicle, depending on how much we use it. So instead, if you're not exclusively using your asset or your vehicle for business use, we want to actually buy that asset or vehicle personally. And what we do is we charge mileage back to the company. It's a non taxable reimbursement the company makes for the business use of your personal vehicle. In many cases, we're looking at 70 cents a kilometer so that you can deduct 70 cents a kilometer. For every kilometer or mile that you're driving inside your business, you get that reimbursement tax free to you tax deduction for the business in many cases. So if we think of in Canada, 70 cents a kilometer, if I'm driving a thousand kilometers a month, that's $700. That might pay for my vehicle expense, my lease cost, potentially my insurance. That might be enough to essentially deduct your entire vehicle. But then you don't have to worry about a personal taxable element related to it. You deduct the full mileage and it's way cleaner in your business. So vehicle expenses can be a really great deductibility, which we want to make sure if it's not exclusively used for your business, that you buy that asset personally and we deduct mileage reimbursements instead. So let's talk about tax minimization strategies for you as an individual and maybe even still being a business owner, but also not a business owner. So one of the greatest deductions that you can get on your personal tax return is going to be an RRSP contribution or a 401k contribution. Essentially this is a personal investment that you're making in yourself. You get a deduction for this pension contribution and then later on when you start pulling that income out, you pay full tax on it. Once again, it gives you the tax savings now and you essentially have to pay the tax in the future. The idea with this is you get that tax deduction now, it grows essentially tax free, and you, when you pull that money out, you pay tax on it. Who hopefully in your higher income earning years, which are now, you're going to be saving a higher tax rate than maybe you would be in your retirement. Now, if you're looking to really build financial freedom, you're not going to get a huge discrepancy in your tax rates. In fact, if you build enough equity and wealth up, your tax rate might be higher. So it's not always going to be the best strategy for you. But as an individual, if you're looking for the greatest deductibility and saving taxes, and it's going to be making an RSP contribution or a 401k contribution. So with tax minimization strategies, let's talk about what a tax free savings account is in Canada. So tax free savings account is essentially a fund that when you put money in, you can pick your investments, but it's registered. And once it's registered, any income that you're earning on those investments are not taxable. Now, unlike an RSP contribution in Canada, you don't get a deduction when you make this initial contribution, but you also don't get taxed when you pull this tax free saving money back out. So I'll give you an example. Let's say I buy Tesla stock and I put it in at $1,000. Right now I don't get a deduction, but that thousand dollars goes in, it turns into $5,000 over the next 10 years. When I pull that $5,000 back out, I've earned $4,000. That $4,000 is not taxable to us. We pull that $5,000 back out, no tax on that situation, and you've now avoided essentially any of the tax associated with that growth. Tax free savings accounts can be a really great idea. One strategy that I like to put in place is to have, because it's around a $5,000 contribution level every year, changes from year to year, but if you put $100 a week into a tax free savings account on an automated basis, you're going to max out your tax free savings account by the end of the year and essentially your money will go in and grow tax free until you need to pull it back out in the future.