28 - Wednesday, August 24, 1988 - North Shore News

AT ONE time or another, most of us dream of being our own boss, running our own business from home. °

Few of us, however, complete the daydream with visions of los- ing money. Yet, in fact, that’s ox- actly what happens to most small businesses for a period of time be- fore they become profitable.

On start-up of an unincor- porated, small, one- or two-person family business, for example, you probably will claim losses for a few years on your tax return before you will begin paying taxes on profits. In order to legitimately claim such losses, however, there are certain tests you must pass to the satisfaction of Revenue Canada, who may not question your losses until three or four

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The first of these tests is to establish that your activity does, in fact, constitute a business, not a hobby, and that there is a reason- able expectation your business can turn a profit. When trying to assess a reasonable expectation, the taxman takes into account a number of issues. These may in- clude your training, your intention to make a profit at the time of starting the business, whether the business is sufficiently capitalized, and whether you run it in a businesslike manner, for example, having a business plan.

Revenue Canada also will throw

.into the equation the profit and

loss record of the business over all its years in operation.

If you pass these tests, Revenue Canada will then try to determine

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whether all the expenses you deduct are, in fact, deductible. And this is where a number of taxpayers run into trouble.

Expenses incurred to earn business income (which also in- cludes a loss) are deductible. These include, for example, day to day expenses for office supplies, salary to an assistant, the cost of enter- tainment and travel, and interest expense on business loans. They also include depreciation (also called capital cost allowance) on business assets (capital costs or ex- penditures) such as the purchase of office equipment — computers or office furniture, for example.

You also are permitted to deduct expenses related to operating your business from your home. If you own your home, a portion of the interest on the mortgage is an

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allowable deduction. If you rent, a portion of your rent is allowable.

A percentage of your utilities, property taxes and insurance also qualify. When deducting such ex- penses, you must apportion them according to business and non- business uscs on a_ reasonable basis. If you use two rooms in your eight-room home as offices, a reasonable formula for apportion- ing costs could be to assign one- quarter of allowable expenses to the business.

It is important for the small business owner to be fully aware of

what constitutes a legitimate business expense. If Revenue Canada concludes that you’ve

taken too many deductions or deductions that you shouldn’t have, you not only must pay the taxes you are considered to owe,

Si

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but you also will be charged inter- est on the amount owing. And, since the rules for deductions for the self-employed are likely to become tougher in 1988, it’s a good idea to stay alert to the com- ing changes.

Moneycare is general financial advice by Canada’s chartered ac- countants. Margaret Dunn is in Practice in Toronto.

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