Tuesday’s= Starting a Business
New business owners often ask me questions about filing the tax return for their business. My answer depends on whether or not the business has incorporated.
If a business has not incorporated then the business income or loss will be added to the owners’ personal income tax return. It is only when a business has incorporated that a separate business return will be filed.
Reporting business income on a personal tax return is an advantage and a disadvantage. If a business is losing money then the ability to put the loss on a personal tax return is an advantage. It will mean that the business owner could recover some of the tax that they paid on other personal income. The inclusion of the loss on their personal return reduces their overall income and therefore their overall tax. New businesses often lose money in their first year so being able to deduct this loss from other income earned by the business owner is a real benefit.
It is a disadvantage to pay personal income tax on business income if the business is making a lot of money. Personal tax rates are higher than corporate tax rates. So typically, as a business becomes more successful that business will incorporate to reduce the amount of income tax that is paying and allow the business to grow. One does not see multinational businesses still being operated as a proprietorship.
The actual form that will be used to report business income on a personal tax return is a T2125 and it looks much like an income statement. Business owners attach this form to their personal income tax return. A corporation files a separate return which is known as a T2.