How Much Can You Deduct
The amount of money that you can deduct on your taxes may not be equal to the total amount of your donations.
If you donate non-cash items, you can claim the fair market value of the items on your taxes.
If you donated a vehicle, your deduction depends on if the organization keeps the car or sells it at an auction. A Donors Guide to Vehicle Donation explains how your deduction is determined.
If you received a gift or ticket to an event, you can only deduct the amount that exceeds the value of the gift or ticket.
Note: Limits on cash and non-cash charitable donations have increased or been suspended. Learn more about charitable deductions in 2020.
How Do Tax Deductions Work
When youre filling out your tax return, there are two ways to claim tax deductions: Take the standard deduction or itemize your deductions. You have to pick one!
The standard deduction is the easy optionits like an automatic tax freebie. If you choose to take the standard deduction, your taxable income is automatically reduced by a set amount based on how you file . That lowers the amount of taxes you have to pay. No need to dig through receipts or bank statements!
Itemizing your deductions takes more workyoull need to list all the deductions you want to claim one by one. And youll have to fill out a Schedule A form with your tax return and go through your records to back up your claims.1
Yes, itemizing is a bit of a hassle, but its worth the effort if you can claim enough deductions to lower your taxable income more than the standard deduction.
How do you know which option is best for you? There are a few things you need to know before you make your decision this year.
Health Savings Account Contributions
Health savings accounts are tax-exempt accounts that you use to pay or reimburse certain medical expenses. You can claim a tax deduction on contributions of up to $2,700 per year that you or someone other than your employer made to your account.
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Tax Deductions When Purchasing A Vehicle
For purchases after 2018, theres a $30,000 ceiling, plus HST, on the capital cost of passenger vehicles for CCA purposes. This ceiling limits the cost of a vehicle for which you can claim CCA for business purposes.
If you purchase a vehicle after 2018, the CRA limits your interest deduction to $300 per month. Despite these limits, you still get a tax benefit when purchasing a vehicle for business use as a self-employed person as opposed to leasing one. Self-employed people who lease their business vehicles cant claim any CCA.
You can deduct the loan interest expense for your business vehicle purchase. To calculate how much interest expense you can deduct for your passenger vehicle, take the lesser of:
- Total interest paid in the year
- $10 times the number of days for which you paid interest on vehicles purchased after Jan. 1, 2001
When completing your tax return, enter the amounts in the Calculation of Allowable Motor Vehicle Expenses area on line 10 of Form T777, Statement of Employment Expenses, and attach it to your paper return.
How To Claim Your Expenses
Complete parts 1 and 2 of Form TL2, Claim for Meals and Lodging Expenses, and have your employer complete Part 3 and sign it. Trips that qualify as an eligible trip for long-haul truck drivers should be reported in Part 2B, and all other trips should be reported in Part 2A. Claim your meal and lodging expenses on line 22900 of your income tax and benefit return. You do not have to send Form TL2 with your return, but keep it in case the CRA asks to see it later.
In the rest of this chapter, you will find information on how to calculate your meal and lodging expenses. For more information about meal and lodging expenses, see Information Circular IC73-21.
To calculate your meal expenses, you can use either the simplified or detailed method, or in certain situations, the batching method. These methods are explained in this section.
The most you can deduct for meal expenses is 50% of your claim . For example, if you use the simplified method, which is based on a daily meal rate of $23 per meal, the most you can deduct is $11.50 for each meal.
Under either the simplified or detailed method, you can claim one meal after every four hours from the departure time, to a maximum of three meals per day. For the purposes of calculating the maximum number of meals allowed, a day is considered to be a 24-hour period that begins at the departure time.
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Understand How Education Savings Plans Work
Parents and students can save for school using education savings plans. These plans can help pay for elementary, secondary, and higher education expenses. The money you save or withdraw from your savings plan for qualified education expenses is tax-free. There are two types of savings plans:
529 plans are qualified tuition programs sponsored by states and colleges. Theyre authorized under Section 529 of the Internal Revenue Code. With these plans, you can:
Prepay or contribute funds to an account to help cover qualified higher education expenses
Transfer or rollover funds from the 529 plan to an Achieving a Better Life Experience account. These funds can benefit the savings account holder or a family member. Learn how an ABLE account can help a person with a disability pay for education, housing, health, and other qualified expenses.
Pay off up to $10,000 in student loan debts.
Pay for fees, books, supplies, and equipment required under qualified apprenticeship programs.
The Coverdell Education Savings Account can be used to pay for eligible K-12 and higher education expenses. You may contribute up to $2,000 per year for each eligible student. When you open the account, the person receiving the benefits must be under 18 or have special needs.
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What Kind Of Vehicle Do You Own
The kind of vehicle you use may affect the expenses you can deduct. If you own or lease a passenger vehicle or a zero-emission passenger vehicle, there may be a limit on the amounts you can deduct for capital cost allowance , interest, and leasing costs.
A motor vehicle is an automotive vehicle designed or adapted for use on highways and streets. It is not a trolley bus, or a vehicle designed or adapted to be operated exclusively on rails.
A passenger vehicle is a motor vehicle designed or adapted primarily to carry people on highways and streets. It seats a driver and no more than eight passengers. Most cars, station wagons, vans, and some pick-up trucks are passenger vehicles. They are subject to the limits for CCA, interest, and leasing costs.
A passenger vehicle does not include:
The Vehicle definitions chart should help you determine what type of vehicle you have. It does not cover every situation, but it should give you a better idea of how the CRA defines vehicles you bought or leased.
What Are Business Write Offs
Business write offs are expenses that are essential to running your business and you can claim them as tax deductions. These expenses get subtracted from your revenue to determine the total taxable income for your business. The more expenses that your small business can claim as write offs, the less tax you are going to have to pay.
That said, to qualify for write offs, a business must be run with the purpose to make a profit, and it cant be a hobby. Most for-profit business expenses are at least partially deductible.
The IRS states that for an expense to be deductible, a business expense needs to be both ordinary and necessary. Simply put, the expense has to be a common expense within your industry and helpful for you to do your work. Still, the expenses dont have to be absolutely indispensable to get considered necessary.
For example, an ordinary expense could be a life coach writing off their business cell phone bill. Taking calls from clients is a common practice in life coaching, so a cell phone would be considered an ordinary expense.
A necessary expense, for example, could be a handyman printing flyers to advertise their services. They can expense the cost of printing the flyers since its a marketing tactic to help his business succeed.
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Fbc Helping Canadians Navigate The Purchase Of A Business
Income tax rates are the same whether youre a self-employed small business owner or work for someone else. Thats where the similarities end. As a small business owner, you can take advantage of a huge number of write-offs that the typical wage earner cannot. These write-offs can help reduce your tax burden and even put you into a lower tax bracket. To make sure youre taking advantage of all the write-offs legally allowed by the CRA, contact the tax experts at FBC. Since 1952, the tax professionals at FBC have worked exclusively with small business owners, farm operators, and independent contractors. Over those 65 years, FBC has helped clients from coast-to-coast navigate the often-confusing world of the Canada Revenue Agency, helping them write-off all the legal tax loopholes, minimize their tax obligations, and maximize their assets. For more information on FBC and the services we offer, call us today at 1-800-265-1002 or submit an online form and an FBC tax specialist will contact you at your earliest convenience.
How To Calculate Capital Cost Allowance
The following information will help you complete Part A and Part B of the capital cost allowance schedule on the back of Form T777.
If this is the first year you are claiming CCA, skip column 2, and start with column 3. If this is not the first year you are claiming CCA, start with column 2. Then complete the rest of the columns as they apply.
Part A – Classes 8, 10, 54 and 55 property
Column 2 – Undepreciated capital cost at the start of the year
If you claimed CCA in any previous year, record in this column the undepreciated capital cost of the property at the end of last year. If you completed Part A of Form T777 in 2019, you would have recorded this amount in column 13. However, if you received a GST/HST rebate for a vehicle or musical instrument in 2020, you have to reduce your opening UCC by the amount of the rebate.
Column 3 – Cost of additions in the year
If you acquired depreciable property in 2020, enter the total capital cost of the property on the appropriate line.
If you owned property for personal use and then started using it for employment in 2020, there is a change in use. In most cases when this happens, the amount you will enter in column 3 is the fair market value of the property at the time you started using the property for employement.
For information on Class 10.1 property, see the section called Part B – Class 10.1 property.
Column 4 Cost of additions which are accelerated investment incentive properties or zero-emission vehicles
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Option 1 Temporary Flat Rate Method
The Canada Revenue Agency has introduced a temporary flat rate method to calculate your home office expenses for 2020 for employees who worked from home in 2020 due to COVID-19 and paid home office expenses for which they were not reimbursed. If you use this method, your employer is not required to complete Form T2200S, Declaration of Conditions of Employment for Working at Home Due to COVID-19 or Form T2200, Declaration of Conditions of Employment, and you are not required to keep documents to support your claim. If you do not use this method, you must have your employer complete Form T2200S or Form T2200 and you must keep your supporting documents.
If you are eligible, you can claim $2 for each day that you worked at home during the four week period plus any other days you worked at home in 2020 due to COVID-19, up to a maximum of $400. Enter the amount of your claim on line 9939 of Form T777S as well as line 22900 of your tax return.
Personal Versus Business Expenses
Generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part.
For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can deduct 70% of the interest as a business expense. The remaining 30% is personal interest and is not deductible. Refer to chapter 4 of Publication 535, Business Expenses, for information on deducting interest and the allocation rules.
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Tax Benefits For C Corporations
“C corporations are the only business structure that can take a charitable deduction directly,” says Barbara Murphy, a partner at the law firm Farella Braun + Martel.
“Corporations may deduct up to 10 percent of taxable income, and this doesn’t vary by the type of donee or contribution,” says Murphy.
“Because the C corporation tax rate is now a flat 21 percent, charitable deductions from C corporations are potentially worth 21 percent of the amount donated in real cash terms,” says Allec.
“That means if your C corporation donates $100,000 to charity, it will potentially save up to $21,000 in taxes on that donation, subject to the 10 percent of taxable income limitation.”
Any excess donations are carried forward for five years, after which they are lost.
No Other Income Report Expenses Now And See The Benefits Later
What if your only income is from freelancing? You may not be able to reap the benefits of those expenses this year but include them on your tax return so your NOL will be reported. You can âCarry Forwardâ those losses to future years.
For example, letâs say you have a NOL of $1,000 in 2020. In 2021, business is booming and your income after expenses is $10,000. Your income tax owed could be around $1,000. But your NOL from 2020 gets carried over to 2021. Your income is actually $9,000 . Because of your NOL from 2020, you could save around $100 on income taxes.
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Telephone And Internet Expenses
If telephone and internet services are integral to your business, they can be deductible business expenses.
Keep in mind, if you use a landline at home, you cannot deduct the cost of your first line, even if you use it solely for work. However, if you have a second landline devoted to the business, the cost of that line is deductible.
If you use your cell phone and internet connection for both personal and business reasons, you can only deduct the percentage allocable to business use. Keep an itemized bill or other detailed records to prove the amount of business use in case your return is audited.
First Job Moving Expenses
Heads up all you recent college grads! If you moved more than 50 miles to take your first job, you can deduct the cost to get you and your stuff to your new location.
The write-offs include 16.5 cents per mile for driving your own car and any parking fees or tolls. You can take this write off even when you dont itemize.
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Salaries Wages And Benefits
You can deduct gross salaries and other benefits you pay to employees.
Do not include:
- salaries and wages such as direct wage costs or subcontracts
- drawings of the owners of the business
- salaries or drawings of the owners of the business since salaries or drawings paid or payable to you or your partners are not deductible
The Canada Pension Plan is for all workers, including the self-employed. Employers, employees and most self-employed individuals must contribute to the CPP. The CPP can provide basic benefits when you retire or if you become disabled. When you die, the CPP can provide benefits to your surviving spouse or common-law partner and your dependent children under 25. For more information on contribution and benefits, visit Service Canada.
Quebec workers including the self-employed are covered under the Quebec Pension Plan .
As the employer, you can deduct your part of the following amounts payable on employees’ remuneration:
- CPP or QPP contributions
- Provincial parental insurance plan premiums, which is an income replacement plan for residents of Quebec
- workers’ compensation amounts for your employees
You report each salary by the end of February on a T4 slip, Statement of Remuneration Paid, or T4A slip, Statement of Pension, Retirement, Annuity and Other Income.
You can deduct the salary you pay to your child, as long as you meet all these conditions:
For more information, see guide RC4120, Employers’ Guide Filing the T4 Slip and Summary.