Tic Tok – It’s The Tax Clock
It’s T-minus 6 weeks till your personal taxes are due – along with any money owing…who’s stomach just dropped? Taxes can be an insane source of stress, anxiety, and confusion, so it’s time to say NO MORE to CRA fears and conquer this “tax” cloud of doom.
IMHO there are 5 keys to a stress-free tax time – here’s the rundown.
[SH] Taxes come but once a year…
This is true, but it doesn’t mean you have to wait till now to get things ready. The best way to avoid (or eliminate) the springtime panic is to keep your shit together all year long. When you have a business, life always gets in the way of staying organized. Receipts get lost, emails go missing, and memories fade (or downright disappear if you’re in the throes of menopause, like me). If you keep up with it, it’s a breeze. How? Jump over HERE to read about my favorite tool for keeping up on receipts throughout the year.
Now, I know, it’s too late now to worry about this for now, but with the new year just starting, you can get a jump for next years’ stress! But for this year it’s time to organize the chaos!
Pull out that shoebox, bag, or empty that drawer full of receipts and get down to business. Dump it out - don't be afraid of the mess; embrace it, cause it will soon be behind you.
One receipt at a time, try to decipher what you actually bought. Supplies for your creations? Packaging? Office gear? Vendor costs? Whatever it is, write it on the receipt and start ultra mini piles for each,
Pull out your calculator and add up each pile – there’s your expenses for the year!
[SH] Inventory
Your creative empire is built on your amazing craft and talent. For most of you, that will mean stocking up on your treasures so they're ready to send out when an order comes in. Even if they're custom-made, you may have partially completed items, stashes of supplies (it’s ok to admit your moderate hoarding tendencies!), or packaging materials stored throughout your studio. Costing your inventory isn't as simple as A + B = C, Accountants have to make it more complicated than that. I get their logic at the end of the day, but still... it’s a pain.
As a "manufacturer" (that's the very corporate term for what you do?!), you don't get to claim the expense of making an item when you make it, but rather when you sell it. This is so that if you make 100 hats in Year 1 but don't sell them until Year 2, you can claim those costs in the time that you made the money, ultimately reducing your tax burden. Bottom line: it’s a good thing. For example, instead of paying taxes on $1000 earned from selling the hats, you pay taxes on the sales MINUS the cost of making those hats (say $450): $1000 - $450 = $550.
So how do we come up with that $450 number? My preferred (aka simplest) way is to figure out your average cost to make an item.
STEP 1:
Set a time frame for yourself - either in the past or upcoming - where you're pumping out your treasures. It doesn't have to be long - a day, week, or month - just enough to give you a good idea of what you use and the time it takes to do what you do!
STEP 2:
Work your magic! But this time, record everything - what materials you use, how much of each, the time it takes you - E.V.E.R.Y.T.H.I.N.G.
STEP 3:
Now put it all together. For the materials you used, how much did you pay for them? If you didn't use all of it, estimate how much (i.e. 30%) and then multiply that by the total you paid for it. For your time, don't sell yourself short! Determine what you're going to pay yourself and multiply this by the time it took you to make your masterpieces.
STEP 4:
Divide this grand total by the number of items you created during your time frame, and voila! You have your average cost. I suggest doing this at least once or twice a year, or whenever your supply costs change.
[SH] Home Office & Studio
If your creative space is outside the home, you likely don't have to worry about this, but if you do any of your creative work at home, or even if you manage your creative work at home, you need to pay attention! You can deduct your home office costs to reduce your taxes. How? First, we need to figure out what percentage of your home you're using for your empire.
METHOD 1:
Count the number of rooms in your house, and divide it by the number of rooms you use for your business. Most people have one office/ studio space, but some may be lucky enough to have a separate space for each. So, if you have 12 rooms in your home and 1 is your creative space; 1/12th or 8% of your home expenses can be put towards reducing your taxes.
METHOD 2:
You can use this method if you are a square-footage guru. I used this method when we'd just bought a new home and had the spec sheet from the realtor - super handy! Just like above, get the total square footage for your creative space/office and divide it by the total square footage of your home. If 150 sqft is used for your business, in your 1200 sqft home, you'll be able to allocate 12.5% of your expenses towards your business.
[SH] GST
There is so much confusion around understanding when and how to charge for GST, and if you do, how to pay it to the government. Here's the skinny: you don't have to charge GST until you're earning $30,000 a year. That's it...sort of. Cause here's the thing - even if you aren't making $30K, many businesses know they're going to build their empire to go there and beyond, so want their customers to come to expect GST on top of their purchase. The most important thing to remember about charging GST is that it's not your money.
Let me repeat that - It's. Not. Your. Money.
You are simply a kind tax collector on behalf of the government. Don't count it as revenue and be especially sure you don't spend it! You can, however, try to make something off of it. As a GST collector, you'll have to send the GST you've collected to CRA either every quarter, or annually (depending on your revenue), so in that 3-12 months that you're holding on to that money, why not put it into a high interest savings account? Not only will you be uber-responsible in separating out those funds from your bank account, but you'll also get the government’s money to give you something back! Consider this your collection service fee.
If you choose to charge GST, or if you have to, you will get the added benefit of getting back some of the GST that you've paid on purchases for your business. This is the other way that keeping your receipts is essential - without these, you won't be able to claim your GST.
When it comes to sending CRA their money, you will subtract the GST you paid on things for your business, from the GST you've collected on your sales. For instance, if you collect $1,000 in GST from your sales, but pay $700 in GST on goods or services for your business. When it comes time to pay your GST, you'll only have to pay the difference: $1,000 - $700 = $300.
[SH] Sum it up!
Now that you've organized your receipts, sorted out your inventory, figured out your home expenses, and nailed down the GST, it's time to put it all together and see how you made out! The greatest benefit you'll get from preparing for tax time, is getting a real understanding of how your business is doing - are you making money? are you charging enough? are your supplies too expensive? These are fantastic insights that will make you think about your business differently and allow you to plan for a more profitable year.
Ultimately you have 3 options for where to put all your fabulous information: a spreadsheet, a free software program, or a paid software program.
There you have it! Once you have all your docs together reach out to someone like me or get yourself a TurboTax account and get those taxes filed!!