4 Financial Advantages of Starting a Business

4 Financial Advantages of Starting a Business

There are disadvantages to leaving your paycheck behind and starting your own business. We already covered four disadvantages of starting a business, but there are advantages on the accounting and financial side too.

Here are four that are worth knowing before you make that jump.

1. You Can Deduct Eligible Business Expenses

The first advantage is that some of the things you’re already paying for may become deductible business expenses.

Think about your phone, internet, or computer. If you’re a tradesperson, you may also have tools or vehicle expenses related to the work you’re doing. When those costs are legitimately connected to earning business income, the eligible business portion can reduce the income you’re paying tax on.

Say you earn $1,000 from employment and your marginal tax rate is 28%. You pay tax on that employment income first, then use what’s left to cover things like your phone and internet. When you’re earning business income, eligible expenses are deducted in calculating your business income instead.

I like to think of it almost like a coupon. If you’re already paying for something you legitimately need for the business, the tax deduction can reduce part of the cost depending on your tax rate.

2. Business Losses May Reduce Other Income

The second advantage is something I think of as one of the superpowers of business income. Let’s say you earn $100,000 from your job and start a business on the side. You give it a real shot, but after your legitimate business expenses, the business has a $20,000 loss.

Depending on your situation, that business loss may reduce the other income you report on your T1. Instead of having taxable income based on the full $100,000 of employment income, that $20,000 business loss may reduce your overall taxable income.

That’s one of the financial differences between trying something through a genuine business and simply spending money personally. Go ahead. Take a risk. Try something out. If the business doesn’t work the way you hoped, a legitimate business loss may still have an impact on your overall tax situation.

3. Registering for GST/HST Can Let You Claim ITCs

The third advantage is registering for GST/HST and being able to claim input tax credits. GST/HST is ultimately meant to be an end-user tax.

As goods and services move through businesses before reaching the final consumer, registered businesses may collect GST/HST on their sales and claim input tax credits for eligible GST/HST they’ve paid on purchases related to their commercial activities.

For a new business, this becomes relevant once you’re paying GST/HST on purchases you need to operate. Registering gives you access to input tax credits on eligible business purchases rather than leaving you to absorb that tax as the final consumer.

You don’t always have to wait until registration becomes mandatory. Some businesses can register voluntarily, but once you’re registered, you’re also responsible for collecting and remitting applicable GST/HST and filing returns.

4. Input Tax Credits Can Help You Recover GST/HST

Here’s where those input tax credits can become a practical advantage. Say you’re an artist and buy a $2,000 MacBook for your business. There’s $100 of GST on that purchase at 5%.

If you’re registered for GST/HST and the purchase qualifies, you may be able to claim an input tax credit for the GST paid based on its use in your commercial activities.

Now think about that across the eligible purchases you’re making for the business. The amounts may seem small individually, but they can add up. That’s why input tax credits can become a real cash cow when you’re regularly paying GST/HST on eligible business expenses.

Want to know which of these financial advantages could apply to your business? We can help you look at the numbers and what they could mean for your situation.

Please note: This content is for general information purposes only and does not constitute personalized accounting, tax, or financial advice. Reach out to us to book a personalized consultation based on your business and financial situation.

There are disadvantages to leaving your paycheck behind and starting your own business. We already covered four disadvantages of starting a business, but there are advantages on the accounting and financial side too.

Here are four that are worth knowing before you make that jump.

1. You Can Deduct Eligible Business Expenses

The first advantage is that some of the things you’re already paying for may become deductible business expenses.

Think about your phone, internet, or computer. If you’re a tradesperson, you may also have tools or vehicle expenses related to the work you’re doing. When those costs are legitimately connected to earning business income, the eligible business portion can reduce the income you’re paying tax on.

Say you earn $1,000 from employment and your marginal tax rate is 28%. You pay tax on that employment income first, then use what’s left to cover things like your phone and internet. When you’re earning business income, eligible expenses are deducted in calculating your business income instead.

I like to think of it almost like a coupon. If you’re already paying for something you legitimately need for the business, the tax deduction can reduce part of the cost depending on your tax rate.

2. Business Losses May Reduce Other Income

The second advantage is something I think of as one of the superpowers of business income. Let’s say you earn $100,000 from your job and start a business on the side. You give it a real shot, but after your legitimate business expenses, the business has a $20,000 loss.

Depending on your situation, that business loss may reduce the other income you report on your T1. Instead of having taxable income based on the full $100,000 of employment income, that $20,000 business loss may reduce your overall taxable income.

That’s one of the financial differences between trying something through a genuine business and simply spending money personally. Go ahead. Take a risk. Try something out. If the business doesn’t work the way you hoped, a legitimate business loss may still have an impact on your overall tax situation.

3. Registering for GST/HST Can Let You Claim ITCs

The third advantage is registering for GST/HST and being able to claim input tax credits. GST/HST is ultimately meant to be an end-user tax.

As goods and services move through businesses before reaching the final consumer, registered businesses may collect GST/HST on their sales and claim input tax credits for eligible GST/HST they’ve paid on purchases related to their commercial activities.

For a new business, this becomes relevant once you’re paying GST/HST on purchases you need to operate. Registering gives you access to input tax credits on eligible business purchases rather than leaving you to absorb that tax as the final consumer.

You don’t always have to wait until registration becomes mandatory. Some businesses can register voluntarily, but once you’re registered, you’re also responsible for collecting and remitting applicable GST/HST and filing returns.

4. Input Tax Credits Can Help You Recover GST/HST

Here’s where those input tax credits can become a practical advantage. Say you’re an artist and buy a $2,000 MacBook for your business. There’s $100 of GST on that purchase at 5%.

If you’re registered for GST/HST and the purchase qualifies, you may be able to claim an input tax credit for the GST paid based on its use in your commercial activities.

Now think about that across the eligible purchases you’re making for the business. The amounts may seem small individually, but they can add up. That’s why input tax credits can become a real cash cow when you’re regularly paying GST/HST on eligible business expenses.

Want to know which of these financial advantages could apply to your business? We can help you look at the numbers and what they could mean for your situation.

Please note: This content is for general information purposes only and does not constitute personalized accounting, tax, or financial advice. Reach out to us to book a personalized consultation based on your business and financial situation.