The Connection Between Corporate Losses and Tax Benefits - Overview
In this post, we'll be giving an overview about corporate losses and their connection to tax.
When costs are greater than revenues, it results in loss. This can be due to a number of factors such as low sales or an investment high in upfront costs.
According to the Financial Post, "corporations that lose money in a given year (and have no taxable income) have the right to use that loss in future years. When the profit returns, corporations can use the past losses to reduce their taxable income."
From an accounting perspective, these losses add up and go on your balance sheet as a deferred tax asset. In other words, you can use your losses to reduce upcoming tax bills. The time frame in which you can use the losses for this purpose is not indefinite.
When claiming expenses, be truthful and reasonable so as not to raise red flags with the CRA. According to the Globe and Mail, "Typical audit triggers include excessive claims for vehicle expenses for work (you must keep a mileage log), meals and entertainment expenses (only half of the amounts are deductible), unreasonable salaries paid to family members, and excessive claims for home office use"
Whether or not you have income from sources outside of your business is important to note. If you have a 9-5 and a business on the side, you would want to write off business losses against your normal income. In other words, the non-capital business losses can be used to offset your normal income.
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Note: these blog posts are written by a communications professional and are not intended to be legal advice. One of our lawyers would be glad to help if you have a specific issue in mind.