Introduction
In India, many small businesses flourish daily. It is necessary that these businesses plan their taxes properly. Otherwise, they end up paying too much tax.
There are various ways through which a business owner can reduce their overall tax liability. In this article, we will understand some best tax planning strategies to help small business owners save tax.
8 Tax Planning Strategies for Small Business Owners
Here are some of the tax planning strategies that small business owners can apply to their businesses:-
- Select the Right Business Entity
A small business owner needs to take care while selecting the business entity. This matters a lot. They need to decide whether to go for partnership, LLP, proprietorship, company, etc. This will have a great impact on tax liability.
- Write off Initial Costs
When you are starting off your new business, you may incur a lot of expenses. These expenses are allowed to be written off as per section 35D of the Income Tax Act 1961. These preliminary expenses can be written off as deductions in five instalments of five years.
- Additional Depreciation
The depreciation that can be claimed on the machinery is 15%. But in the case of a manufacturing business, you can claim more depreciation for the machinery purchased. As per the IT Act 1961, an additional 20% of depreciation can be claimed on machinery in the year of its purchase.
- Home Office Expenses
Many small business owners operate their business initially from home itself. So if you operate your business from home then you can claim a deduction for expenses of a home office. This includes expenses like depreciation, utility bills, property tax etc.
Deduction for depreciation can be claimed as per Section 32. And other home office-related expenses can be claimed under Section 37.
- Ensure to Deduct TDS
TDS helps you reduce your overall tax burden. As per the IT act, it’s necessary to deduct TDS for certain payments like commissions to business agents, payments to freelancers, payments to recruitment firms for staffing services, etc.
If you as a business owner fail to do so then these expenses become inadmissible. So you won’t be able to claim a tax rebate for this. So maintain a record of such transactions and deduct TDS at 10%.
- Pay Municipal Tax Online or through Cheque
Taxes paid to municipalities can be claimed as a deduction. In order to claim this you need to present a copy of the payment record. It’s better to make such payments online or through a cheque.
This is because this will have bank transactions. So even if the receipt is lost, the deduction can be claimed on the basis of bank entry.
- Avoid Cash Payments
Majority of the business owners have now shifted to online payments. But there are still certain businesses which require some amount of cash payment. Take care that these cash payments don’t exceed ₹20000 in a day. Because any cash payments beyond this limit in a day are not eligible for deductions.
- Record Expenses
Try to keep a record of each expense in your business. You can use the latest accounting software to maintain accuracy in recording expenses. If you don’t maintain a record of business expenses in a proper manner, you end up paying more taxes.
Conclusion
Tax planning is very necessary for small businesses to reduce expenses and save taxes. By applying the proper strategy you can save a lot of money in taxes. Take account of changes in tax laws. This will help you to change the tax strategy accordingly.
