Edmonton Tax Accountant | Businesses Utilizing The Small Business Tax Rate
One of the benefits of incorporating business, says Edmonton tax accountant is being able to utilize the small business tax rate. The Fraser Institute says that the average Canadian pays 43% of their income in taxes, which include income tax, CPP, EI, GST just to name a few. By comparison, only 37% of their remaining income pays basic necessities such as food, clothing and shelter. Business owners can immediately save significant taxes simply by incorporating their business, because the small business tax rate in Alberta is currently at 11%. Business owners who want to stop paying upwards of 43% of their income in taxes, can incorporate their business, in order to take advantage of that 11% tax rate.
Business owners should know, that in order to take advantage of this tax rate, the income that they are saving taxes on must be made from an active business. This means says Edmonton tax accountant, that no passive income is able to get this 11% tax. Passive income includes dividends, rental income, and stocks and bonds. Another important thing to know when it comes to the small business tax rate, is that business owners must be incorporated in order to get this rate, and they have to make up to $500,000 per year, and not more. This is most of the small businesses in Alberta, once a business owner is making more than $500,000 in a year, they are not considered a small business anymore.
One of the most important ways that this can help businesses says Edmontons tax accountant, is by helping a business owner spread out the income that their business has made, allowing them to reduce tax from higher income years. That means, if business had an extremely profitable year, by incorporating, they can use the corporate structure in order to bring in the money slowly over the next year, and avoid paying high taxes on large draws. This can also help a business owner plan large expenses, or even periods of time whether not going to be in their business, so that they can continue drawing a salary even when theyíre not there.
Another significant way that using they small business tax rate can help business owners says Edmonton tax accountant, is helping business owners accumulate wealth through their investments. If a business owner wants to invest money each month into their portfolio, by paying less taxes, that business owner can put more into their portfolio each month, and utilizing this strategy each year for several years, can have a huge impact on how much wealth can be accumulated in their portfolio.
There are also some secondary benefits of incorporation says Edmontons tax accountant, including being able to decrease the personal liability that a business owner has in their business. Without incorporating, a business owner has all of the liability, and can get sued. Once a business owner incorporates, that limit the amount of personal liability they have in their business because the corporation takes a lot of that liability.
Many business owners wanted to become entrepreneurs in order to be in charge of how much money they would be able to make and save in their life says Edmonton tax accountant. By utilizing the small business tax rate, business owners can do just that. The current top personal tax rate in Alberta is 48%, which means almost half of what an Albertan makes is taken by the government in taxes. And even though 48% is the top, the average Canadian pays 43% of their income in taxes. However, entrepreneurs who incorporate their business can start taking advantage of the small business tax rate, which is 11%. Simply by incorporating, they can save up to 37% in taxes which can make a huge impact on their business in several ways.
One of the first ways that they can help a business owner, is through wealth accumulation, which is often what a business owner first thinks of when they become a business owner. Being able to make as much money as they can, because they have an unlimited potential to increase revenue in their business, which means they will be able to put more money into investments, and accumulate wealth. By utilizing the small business tax rate, Edmontons tax accountant says business owners can do just that by paying lower taxes, they can put more money towards investments. For example, if the business owner wanted to invest that thousand dollars a month into their portfolio, without incorporating, business owners would have to pay for hundred and $80 to the government in taxes, meaning that they would only have $520 to invest each month. By using the small business tax rate, business owners would only have to pay hundred and $10 in taxes, meaning they can put $890 a month into their portfolio. This allows business owners to accumulate wealth significantly, especially if they utilize this method over several years.
Another great benefit of incorporating in order to utilize the small business tax rates says Edmonton tax accountant, is that they can utilize this method in order to eliminate debt. This is especially important for business professionals such as doctors, lawyers, dentists, accountants, who have taken on significant personal debt in order to obtain their professional degree, and often begin their practice deeply in debt. By incorporating early on in their practice, these business professionals can pay only 11% in taxes, and use the difference to pay down their debt quicker. This can make a huge impact on their professional corporation, by allowing them to become debt free much sooner.
Business owners may wonder what amount of money their business needs to be making per year in order to make incorporation worthwhile, and Edmonton tax accountant recommends that once a business owner is making more than $50,000 a year, they are spending more money not to be incorporated.