What is Net Income and How Does it Affect my Taxes?
As a sole-proprietor, partnership or corporation you have the ability to claim business expenses against your income.
What this means is that your revenues (i.e. income) will be reduced by your business expenses.
Why is this a good thing?
Taxes owed to the tax authorities (Canada Revenue Agency or CRA) are calculated on this "Net Income" number - more specifically - the difference between your Revenues and Business Expenses.
Let's use an example: For a corporation operating in Ontario, Canada earning under $500,000 in Net Income, the tax rate is 15.5%.
So, if the corporation earned $100,000 in revenues and incurred $20,000 in business expenses, the Net Income amount is $80,000. Taxes of 15.5% will be calculated on the $80,000 rather than the $100,000:
1) $100,000 of income with no business expenses = $15,500 in corporate taxes
2) $100,000 of income with $20,000 of business expenses (i.e. $80,000 Net Income) = $12,400 in corporate taxes
As you can see, incurring $20,000 of business expenses saved your corporation $3,100 (or 15.5% of $20,000).
In our next blog post, we will discuss the most common Expenses that businesses can claim. We will also go over which common Expenses business cannot write-off against their income.