6

Have been working full time, switching to at least part time contract work. I'm looking at starting a company and having all my contract pay go through it.

Assuming I'm also working at least part time at a different company, let's say my company (StackOverflowed Inc for now) makes $30,000 in a year. However, company spending wipes out most, if not all of that revenue (office space, car, gas, servers, outsourced work, etc). Do I owe taxes on what the company earned or what what the company has left over or some other measure? Assume I take no salary in the first year from my company.

Edit: For estimates on the year:

Not sure if it will help -- it will be roughly $30k in earnings, $1000 / year for IT costs, $20k for a company car, $1500 for printing costs, $2000 in travel expenditures, and about $2000 in misc costs.

So about: $30,000

minus $20,000

minus $ 2,000

minus $ 1,000

minus $ 1,500

minus $ 2,000

total: $ 3,500 remaining

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    Generally, a business is taxed on profits. – Neil Meyer Nov 9 '17 at 12:16
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    @NeilMeyer Generally, yes. But bear in mind that tax law is often not that simple. I don't know about Canada, but for example here in the US you cannot deduct the cost of goods you buy for resale until the year in which you sell them. You cannot deduct the cost of buying new equipment when you pay for it, but you must depreciate it over a specified time period. Etc. It is quite possible to have more expenses than income, but still show a "profit" for tax purposes. – Jay Nov 9 '17 at 16:56
  • @Jay If at the end of the year, the company has no money, what usually happens? – StackOverflowed Nov 9 '17 at 20:07
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    @StackOverflowed Depends. In the US, the amount of cash you have at the end of the year has absolutely nothing to do with your taxes. You calculate your sales minus your tax deductible expenses. Tax deductible expenses are related to actual cash flow expenses, but they're not the same. They can be higher or lower. For example, if you buy a piece of equipment this year, the tax deduction is less than the total cost. But next year you'll have a depreciation deduction even though you didn't have cash out. So you could have a "tax profit" even though you don't have a "real profit", or vice versa. – Jay Nov 9 '17 at 22:35
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    Corporate spending isn't deductible any more than personal spending is. Only expenses are deductible. Buying servers and cars are not expenses -- they're investments. Rent for office space is an expense. Gas is an expense. – David Schwartz Nov 12 '17 at 12:56
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So the main reason that you aren't getting answers is that the question is not really answerable on this site without putting a lot of details about the expenses of your company online. Even then you will need someone who specializes in Canadian taxes to go through those details to be sure. Most of those people feel like they should be paid a decent amount per hour to go through the details.

That being said, I dealt with a similar question for my contract work company by just taking a couple weekends and calculating the taxes myself on estimated numbers. It was time consuming but not really that hard. I thought I might have to buy software, but all I needed was a small calculator. Along the way I learned a few details that helped me lower my overall tax exposure.

I found that Neil was generally correct that you are "taxed on profits" but it is worth doing the taxes yourself because the details can really matter.

  • Thanks for the update, updating the cost with predicted expenditures. – StackOverflowed Nov 13 '17 at 17:54
  • You really need a professional accountant (in the US it would be a CPA - not sure what the equivalent in Canada is) as there are many intricacies to tax accounting that are not suitable for a general Q&A site. That said, you probably cannot expense all of the car when you buy it - you create an asset and depreciate it over time. You can deduct the maintenance and gas, but not the purchase. Same might go for the IT costs. Did you buy servers, or are these changes for internet, hosting, etc.? Again, these are generalities that only a professional specifically analyzing your business can answer. – D Stanley Nov 13 '17 at 19:28

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