How Tax Affects Your Business and Financial Performance (And the Three Key Things to Know About Taxes)

Many business owners struggle with ways to minimize their taxes. While you can’t avoid them, it’s possible for you to pay a fraction of what you used to.

Taxes. They are an integral part of how the financial system works. And they might not always seem fair, but you have to pay them.

The beauty of the system is that you can reduce your taxes significantly, whether it’s personal income or business taxes. You just have to learn how the system works and become familiar with the possibilities.

As a business owner, reducing your taxes should be a top priority. Because the reality is that taxes eat away at your profits like nothing else.

Keep in mind that how you’ll reduce your taxes will depend on various factors. 

But before you can develop a strategy with your accountant or financial advisor that’s tailor-fit to your business, here are three things you need to know about taxes. Particularly about deductibles, receipts, and saving money to pay your taxes.

Gifts as Part of the Compensation Package

So, you want to increase the operational performance inside your business. 

To make that happen, one of the first things many employers do is dream up ways to reward their employees.

Why?

It’s a good way to deduct a couple of things and lower your income tax. Thus, many business owners will offer added incentives as part of the compensation package.

And here’s why you should absolutely know what is and isn’t taxable:

It’s not just for your benefit but also for the benefit of people working for you.

Keep in mind that you can give an employee a gift with a value of up to $500 every year that won’t be taxable to them. However, you can’t gift them cash or cash equivalents such as gift certificates. 

Anything outside those can add up to the $500 limit without becoming a financial burden on your employees.

That said, what if you were to give an employee a gift worth $800? 

In that case, that employee would have to add another $300 to their taxable personal income.

And here’s why this is important to know:

When you give someone a gift worth more than the $500 limit, there’s usually no tax withheld for that. Therefore, employees might find out they owe money only when they file their tax returns. 

In this situation, most of them will get upset, even if they appreciate the thought. 

It doesn’t make for a good work atmosphere. After all, your employees aren’t keen on paying more taxes just like you.

So, here’s what you have to keep in mind:

You can deduct some gifts and other employee compensations to reduce your taxes. But you shouldn’t make life harder for your team members in the process.

That’s why it’s important to learn about the limitations and restrictions around compensation packages. Gifts are a great way to reward hard work. But some can force your employees to pay extra taxes.

Holding on to Your Receipts

Here’s a question I get a lot:

“How long do I have to keep my receipts after filing my income taxes?”

Unfortunately, there’s no straight answer to that - it depends.

For example, the Canada Revenue Agency suggests that you keep your receipts for seven years from the date of notice of assessment. Of course, this is just for tax purposes related to whether you’re operating or have a business incorporated on Canadian territory.

With that in mind, here’s something that might make the receipt issue even more annoying for you:

I recommend you save some receipts even longer. 

And I’ll give you an example to explain why I say that.

Imagine that you’re buying a property for investment. 

Let’s say it costs $100,000, and you hold it for 10 years before selling it for $1 million. You’d want to determine the capital gain on that property. Therefore, you’d need the original documents and receipts.

In this case, throwing away the receipts after seven years would make things very difficult in the future. You’ll need access to those documents to support a future tax obligation. 

Why?

Because you know that you’ll dispose of the asset at some point.

Of course, this isn’t mandatory. Day-to-day receipts, bank statements, debit card transactions, and other receipts need to be kept for seven years from the date of the notice of assessment on your tax filing paperwork.

But if we’re talking about valuable assets or important transactions, you’ll have more peace of mind if you keep those receipts for longer.

Putting Away Money for Taxes

Business owners are always interested in knowing how much they should set aside for income taxes, sales taxes, etc. They want to make sure that they don’t run out of cash resources to pay these liabilities once they’re due.

This should be easy to determine if we’re talking about sales taxes. 

Because with every sale, you’re adding on the sales tax and collecting it on behalf of the government. All you need to do is track your numbers in your bookkeeping system and do the math. You’ll quickly figure out how much money you have to set aside.

Where it gets trickier is with income tax.

Why?

You never know exactly how much you must pay at the end of the year until you put your entire financial year in review.

Until then, you can only work off estimates.

Now, let’s say you’re approximating an income of $100,000 for the year with a 12.5% corporate tax. 

I recommend putting aside about $1,100 per month away. 

You can even park it in a separate account or set it up for recurring payments. This way, you won’t have a huge lump sum liability tax to pay at the end of the year.

However, your projections might change on a monthly or quarterly basis. If that happens, it’s best to modify your savings or payment plan and adapt it to the new income.

This will help you avoid dipping into the money that should cover your income tax liability.

Learn to Navigate the Tax System

You need a better understanding of how taxes work and how to work the system in your favour. Otherwise, you’re letting the government pick apart your profits until you feel more like an employee instead of a successful entrepreneur.

While some things can help you reduce your financial obligations at the end of the year, everything should be done in balance. 

For instance, you can’t give your employees a ton of stuff and shift the financial burden onto them. This will make for unhappy team members that will likely negatively impact the operational performance inside your organization. 

Also, keep in mind that some receipts are worth keeping longer than others, especially if you want to understand your financial situation. And sometimes, setting aside money monthly for taxes is the best way to avoid having to pay massive amounts when you’re unprepared.

Truly, it’s the little details that make a huge difference.

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