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Business expenses not always what they seem.

One of the most basic administrative tasks in a small business is tracking your revenues and expenses, then subtracting the latter from the former to arrive at your profit. It sounds simple enough, but it actually isn't. Unlike "a rose is a rose is a rose," an expense is not always what it seems. And, unless you can tell one kind of expense from another, not only will your financial records be out of order but you can also get into hot water with Revenue Canada.

"Basically, there are two kinds of expense or cost categories," explains David Christilaw, CA, a partner with chartered accounting firm Millard Rouse & Rosebrugh in Brantford.

If you're buying something major, such as a vehicle, office furniture, computers, machinery, equipment or even a building, that's a capital expense. "This refers to a major item of enduring or lasting value to the business, bought to provide the facilities for earning income," notes Christilaw.

A normal business expense, on the other hand, is incurred for a business use aimed at earning income. Such expenses come in various categories, including: repairs and maintenance; municipal and business taxes; utilities such as hydro and heat; phone, fax, postage and courier costs; advertising and promotion; janitorial services; rent for office space; and office supplies. "These expenses," says Christilaw, "are relatively minor, are usually recurring and offer short-term benefits to the business."

Capital expenses, advises George Ormsby, CA, a sole practitioner in Mississauga, are written off for tax purposes over several years, "usually over what Revenue Canada calls the useful life of the asset. Normal business expenses, however, are written off 100 percent in the period in which they are spent, which is an obvious tax advantage."

It is sometimes difficult, though, to figure out into which of the two categories an expense may fall. "Say you've bought some tools you think will last a couple of years," Ormsby suggests. "Should you write them off right away or over two or three years? The answer can depend on several factors. This is where experience comes in."

"Or, for example, you are remodelling your building and are replacing the electrical system and repainting the offices." adds Peter Sevitt, CA, a partner with Toronto-based Brass, Sevitt & Malinsky. "If you're just restoring something to the way it was before, the money you spend is probably a current expense to write off right away. But, if you're improving the facilities or actually adding something new, that will probably fall into the capital expense category."

Sevitt points out that different capital expense categories have different write-off rates, with cars being depreciated at 30 percent a year, as are computers, but office furniture is written off at only 20 percent annually. "If you guess wrong with any of this, Revenue Canada may well reassess your corporate tax returns. And that could mean interest and penalties being assessed."

"The treatment of expenses is anything but clear-cut," laments Ormsby. Fortunately, he adds, chartered accountants have both the training and the expertise to figure out what is what," even when you get into some pretty grey areas."
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Title Annotation:two kinds of expense or cost categories for businesses
Publication:Canadian Manager
Geographic Code:1CANA
Date:Sep 22, 1999
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