Tax season has started, and most businesses are preparing to file their 2023 tax returns. However, due to a lack of experience, knowledge, and efficient operations, some small corporations may incorrectly file their returns. This could lead to consequences, like overpayment of taxes, hefty fines, interests, and even legal issues. Below are some of the potentially costly mistakes that businesses should avoid.
Failure to File and/or Pay on Time
Corporations should file their annual tax returns within six months of the end of the fiscal year. However, before the due date the company must pay the balance of taxes owing within two or three months of the end of the fiscal year.
Additionally, within a tax year, tax installments should be remitted either every month or every three months. These installments are a partial payment of the total amount the corporation has to pay for the year. However, if the company is in its first year of operation, it doesn’t have to pay installments.
Filling a late tax return will result in fines and interest charges. Fines are calculated as 5 per cent of tax owing, while interest is 1 per cent for each full month. Recurring late filings will result in double fines and interest charges. If a company fails to pay the installments on time or doesn’t pay the full amount, it is subject to additional financial penalties.
Managers and business owners must always keep due dates in mind to avoid missing deadlines, especially when it comes to tax installments or any tax payments.
Inaccurate Financial Reports
Taxable income is calculated based on adjustments of a company’s annual financial report. Financial reports are required to follow GAAP (Generally Accepted Accounting Principles) when used for filing tax returns. If the reports are prepared solely for the owners, it is not necessary for them to strictly follow GAAP. The CRA, however, only accepts financial statements prepared in compliance with ASPE (Accounting Standards for Private Enterprise) or IFRS (International Financial Reporting Standards). Financial reports that don’t follow GAAP may result in an understatement of taxable income, which could, in turn, result in fines, interest charges, and even legal issues if identified by officials.
The reason for non-GAAP financial reports being filed could include (1) a lack of personnel in the company with sufficient accounting knowledge, such as managers unfamiliar with realizing gains or losses from barter exchange; (2) the corporation committed tax evasion by manipulating business information, such as not recording cash payment collected; or (3) weak internal controls resulting in errors or even fraud when tracking and recording operations, such as employees making data entry mistakes that went unnoticed.
Failing to Claim Deductible Expenses, Loss Carry-Over and Credits
There’s a wide range of expenses that businesses can deduct to reduce their taxes. New and/ or inexperienced corporations may fail to claim all eligible expenses due to lack of knowledge, which subsequently results in an overpayment of taxes-money that the company could keep in its coffers.
Some expenses are tax-deductible, such as a reasonable amount of provisions for bad debt, capital cost allowances for properties, and small business deductions for qualified companies. If the office is based in a home, a portion of home expenses could be deducted for tax purposes, including pro-rated rent or mortgage payments, utilities, supplies, insurance, and other costs. All expenses incurred for the purpose of earning revenue should be eligible for tax deductions.
Additionally, previous-year capital losses from selling properties and non-capital losses from businesses could be carried backward and forward so that unused previous-year losses could be used to reduce a company’s taxable income until it reaches zero.
A corporation can also claim various tax credits to reduce the total amount of tax it has to pay, such as tax credits resulting from charitable donations and investment credits in qualified research programs. The CRA has listed around 70 tax credits that new businesses can check for eligibility, complete with the requirements to match the relevant credits.
Claiming Non-Deductible Expenses
Not every expense incurred can be deducted, and overstated expenses will result in an understatement of tax payable. If a CRA reassessment finds ineligible expenses have been claimed, it could result in financial penalties and interest charges. If the misstatement proves to be significant, legal issues may arise and negatively impact business operations.
Common non-deductible expenses include payments for penalties from the government, expenses used for non-business-related events, membership fees for various clubs (only half of meals and entertainment are deductible), superficial losses, and expenses that are unreasonably higher than the market average.
Insufficient Proof
For tax returns, the onus of proof is on the taxpayer. Companies should keep records of each relevant transaction (such as receipts, contracts, and confirmation letters) to verify its existence and accuracy. More than that, businesses must ensure they have sufficient proof that those expenses are necessary for their operations. Otherwise, the CRA may reject the deduction of those expenses, even if they were necessary.
The truth is that many small businesses do a poor job of tracking expenses and maintaining proper documentation. Among the possible reasons are weak internal processes and controls or inattentive management or financial staff. In reality, many small companies operated by individuals, or a small number of people can’t afford to hire an expensive CPA to oversee their finances. It takes significant time, effort, and cost to hire good accountants and build strong internal controls. However, that doesn’t mean it’s impossible for small companies to make progress. In fact, their businesses are often relatively simple, and it’s not as difficult to keep accurate records.
Small businesses can outsource to professional public accounting firms to help them with bookkeeping and preparing financial reports, as well as to provide suggestions to enhance internal controls. Due to the large number of public accounting firms in the market, corporations can negotiate and select the best accounting firm to suit their needs, and this is never more important than at tax time. Additionally, if business owners have the time, they can improve their own knowledge of accounting and tax regulations to help their business, particularly if their operations are relatively simple and don’t require complex financial reporting.
Jinglin Liu | Contributing Writer
