Tax Tips: Catering to small business

Many will remember 2011 as a year of economic challenges. Small business owners in particular have had it rough and while they hope for a better year ahead, there are still a few things they can do to end this year on a positive note.

Year end tax planning is certainly tops the list. Here are a couple of tax tips that small business advisors can share with their clients and help them either avoid some tax consequences or take advantage of some untapped tax breaks.

Selling a business generates taxable proceeds; by reinvesting the proceeds in another small business, owners can defer the tax. To qualify, though, the proceeds must be reinvested in an eligible business at any time during the year the business was sold, or within 120 days after year-end.

Gary Dent, national tax leader at Grant Thornton says those looking to sell their business must defer the tax. “If you sell your business or shares in your business and would realize a capital gain, there are certain deferral opportunities available if you roll those proceeds or a portion of the proceeds over into a new qualifying business within the same year or within 120 days after the year of sale.”

Another useful tax tip for small business owners is investing in new equipment to generate a deduction before year end. Employed trades people are entitled to a tax deduction of up to $500 for new tools, not including items like cell phones and computers.

The deduction applies to purchases that total in excess of $1,065, so if they haven’t purchased at least $1,565 in tools this year, they should try to max out the deduction before December 31.

“If they spend $1,000 this year and another $500 or $600 next year, they could have moved that $500 or $600 into 2011 and would have got a deduction for it,” he says. “If they spread it over two years they will not get any deductions for it because they will not have exceeded the minimum amount.”

Of course, the tools have to be relevant to the buyer’s trade; the CRA will not allow any claims unless the taxpayers can prove that those tools are necessary for the business.

The tax incentives may not represent a large amount of money, but it does make the tools a little bit more affordable. Besides, that $500 deduction is in after-tax dollars.