What constitutes a business expense?
I get this question ALL the time from my business clients.
As a general rule, expenses must be incurred with the purpose of earning business income. The expenses must be reasonable and justifiable. I’ve compiled a list of the more common expense questions with the answers to perhaps paint a clearer picture.
Are haircuts a business expense?
This is a solid NO.
Personal grooming costs are not deductible… even though you may have to look presentable and professional to meet with customers and clients. Let’s be honest, almost everyone who is working with the general public should be somewhat groomed. This is a human thing—not a business expense.
What about clothing?
Canada Revenue has a stance that unless the clothing is considered a uniform, it is not deductible. A loose definition of a uniform is something that a normal person would not wear to a mall. (I purposely did not mention Walmart here). This means that your business suits are not deductible. There are occasions where clothing may be permitted as an expense.
- Clothing that is specifically required safety gear is a reasonable and justifiable deduction.
- Clothing that contains your logo for advertising purposes would also be considered deductible.
Go ahead and order your next golf shirt, jacket or hoodie from a promotional supply store and be a walking billboard (I personally think this would be hilarious if you had a numbered company with no real logo).
Is a home office a business expense?
If you are working out of your home, yes, a portion of the expenses can be expensed. If you are paying rent at an official business location (or own the space), you likely cannot also deduct for your home office. If you are expensing a portion of your home for business purposes, do be careful not to be too aggressive with those claims.
I’d be hesitant to claim more than 10% of your homes’ costs (mortgage interest, property taxes, repairs and maintenance, utilities, insurance, security system, etc.).
If you’re claiming more, Canada Revenue Agency deny a portion of your principal residence exemption when you go and sell your home. In other words, if you claim 40% of your home expenses for your business, CRA would argue that 40% of your home was for not for personal use and therefore, you’d have to report 40% of any gains on sale as income on your taxes.
How are telephones a business expense?
If you still have a landline in your home, you cannot deduct this for business purposes… just the specific charges for any long-distance calls related to business. Your business cell phone can be deductible. Communicate with your cell phone provider that you have a business as certain carriers have special pricing for business owners.
What about conferences?
Here is a brilliant way to make your next trip to Vegas a business expense! Find a conference that is somewhat relevant to your business operations. You can deduct up to two conferences per year.
Paying your children or spouse a wage.
This one boils down to the expense has to be reasonable and justifiable.
- Can you pay your 3 year old $10,000 a year for sweeping out the garage?
- No. This is not reasonable.
- Can you pay your husband $150,000 per year for sorting receipts?
- Likely no—because you wouldn’t pay someone you weren’t related to that kind of amount.
- Can you pay your teen minimum wage for sweeping out your shop? Or pay your spouse fair market value for administrative work?
- Yes. This would probably be considered reasonable.
Keep a detailed timesheet to document and justify the expense…just as you would to any other employee that wasn’t closely related to you or sharing your bed.
How do meals and entertainment factor into business expenses?
Yes, these are deductible expenses… but don’t go too crazy.
- Go for lunch with that potential referral partner.
- Buy a coffee for the potential new client.
- Take the staff out to celebrate completing a major project.
- Order dinner in house when key staff are staying late to get the job done.
Don’t try and expense every single meal you eat through your company. Similarly, your personal groceries are not deductible. Again, these expenses need to be reasonable and justifiable.
For example, an oilfield contractor would have a tough time justifying how Oilers season tickets were a legit expense to earn business income. On the other hand, if you typically dealt with many customers and relied on referrals, perhaps you could deduct some of those hockey tickets because you gave them to clients or associates as a thank you for referring new business. Documentation is key in this case. Who got the ticket and why?
Every business is unique. If you have specific questions of what types of expenses would be considered reasonable and justifiable for your operations, feel free to contact us.
Angela Richardson is a Chartered Professional Accountant (CPA, CGA) with more than 17 years experience working in public practice with small to medium sized businesses. While financial statements and tax returns are part of the occupation, consulting and assisting clients to achieve their entrepreneurial dreams is her true passion.