Every business and individual needs to pay income tax on their income in any financial year. Some of them pay more income tax, some pay less, but it’s unavoidable. However, if the small business owner doesn’t realize the need for tax planning, they will pay much more income tax to the Government. And most of the first-time entrepreneurs fall into this category.
While income tax is necessary to pay, and our legal and moral obligation, legal provisions and strategies exist to save this direct tax. And if you are eligible for the exemptions, then you should avail them.
Before we share the nine Tax Saver Plans and explain what tax planning is, let’s us first clear the doubt between GST and income tax for a small business (and entrepreneur)
Are You Paying Double Tax With GST and Income Tax?
No! You are not.
GST or Goods and Services Tax is an indirect tax imposed on the goods and services you are ‘selling.’ If your annual turnover is more than Rs 20 lakh, your business needs to register for GST and file the GST. GST is calculated on your sale, and not income.
You are collecting GST from your customers and passing on to the Govt.
But income tax is a direct tax and levied on the ‘income’ generated by a business or an individual, who can be an entrepreneur, a salaried person, an investor. Based on the slabs of income, this direct tax is calculated. There are legal ways and strategies for your business to save this income tax, especially for small businesses and new entrepreneurs. There exists Tax Planning for New Business, which we will share, along with Tax Payment Plans.
Tax Planning For Small Businesses: 10 Ways Small Businesses Can Save Money
Hire Family Members As Employees
By hiring family members as your employees, you can save money on your income tax, since the salary paid to employees is a cost to the company and can be excluded from taxable income.
And pay them Rs 2,50,000 per year, so that they are not liable to pay any income tax.
Travel, Accommodation Expenses On Company Account
If the business owner or employees need to travel, as part of the job, then spend the money using company accounts. Traveling done for the growth, expansion, and business operations are deductible from the taxable income.
Marketing Expenses As Tax Rebates
The expenses for marketing and advertisements for business are deductible under the income tax laws for corporations and companies. Any expense made to bring in new customers or retain existing customers can be cut from the taxable income.
Utility Expenses Are Tax Deductions
If a business is spending on utilities such as electricity bills, phone bills, parking, vehicle, etc., these expenses can cut taxable income and help you claim a tax rebate. But note here that these utility expenses should be purely for business purposes. The money spent on vehicle maintenance, drivers’ salary, and petrol, for example, is tax-deductible and lowers your taxable income.
But in case of an audit, you will need to prove that the vehicle was used for business purposes only. If you work from home as an entrepreneur, then home electricity bills and income tax can be tax-deductible.
Consult a Tax Professional and know about Section 35D of Income-tax laws for more clarification.
Under Section 80D of income tax laws, medical insurance paid up to INR 25,000 for the business owner, their family members are tax-deductible, thus reducing your taxable income.
However, if the business owner is also doing a job, where the employer is paying for medical insurance, this tax rebate won’t apply.
If the small business owner has taken a home loan and pays interest on the repayment via EMI on the same, then under Section 80C and Sectio 24, tax rebates can be claimed. Both on the interest paid and principal amount.
EMIs paid for Home loan from a bank is a tax-deductible expense, only if the PAN Card is linked with the company.
Depreciation On Machinery
Manufacturers can claim upto 20% additional depreciation on the new machinery bought in a financial year. This provision is under Section 35AD.
In the case of existing machinery, upto 15% depreciation is allowed.
Stop Using Cash, Adapt Digital Payments
There are various tax provisions to save money if a business uses digital mode to make and receive payments. This is especially relevant for small businesses and merchants. Besides, using cash extensively is an open invite for being red-flagged by the Income Tax Department. If you pay more than Rs 20,000 to a worker in cash, in a single day, then that transaction will be nullified.
Being digital is one of the smartest Tax Planning strategies.
Pay Municipal Taxes By Cheque
There are provisions for tax benefits for an individual and a business if the municipal taxes are paid with cheques (home/office/factory).
The municipal taxes can be deducted from income from real estate, and the most efficient way is by paying via cheque.
Pay Income Tax On Time
Income Tax Department also advises to pay income tax on time, and there is a reason behind this. If the income tax is paid on time, you can avail of many tax rebates schemes and programs.
For example, business losses can be forwarded for eight years, from the year when it was first reported and set-off against taxable income.
But if you are late for filing income tax, then this tax-deductible provision is not granted.
These are just some ways a small business can do tax planning and save on income taxes. If this tax planner blueprint is not helping you, then don’t panic!
Consult with our Expert Tax Professionals and Tax Planners from MSMEx, and clear all your doubts and queries about tax planning. Find out when and how you opt for Tax Planning Service and understand the corporate taxes and GST better.
Book your slots at your convenience after researching their experience and expertise. For more information, please visit us at MSMEx.