Income tax saving tips for small business owners

Introduction

A small business has many expenses, from increasing inventory, repairing machinery, paying payroll to daily working capital requirements. Small business owners have limited cash flow and capital. Moreover, their revenues are low, so they require even financial assistance from lenders in times of a financial crisis. Either they borrow, or they may take a business loan. Hence, they need to manage all expenses very carefully. One such expense is tax savings. From favourable interest rates to collateral-free loans, opting for a Business loan can also help tax savings.

Small or large, every business is subject to income tax laws, and everyone wants to minimise their tax liability. A small business can wind up paying more tax than it needs to if it is not appropriately researched. Hence, the main question is how to save tax in business in India? This article aims to teach small business owners some tax-saving ideas to save income tax.

What are the Income-tax rules for small business owners?

The income tax rules for small businesses in India are different and need to follow limited compliance compared to other businesses. A small business or profession has been provided with special sections by the government. These are called “presumptive taxation schemes.” Under presumptive taxation sections 44AD, 44DA, and 44AE of the Income Tax Act, specific resident individuals, resident HUF, a resident partnership firm (excluding LLP), and small businesses are not required to provide detailed accounting or keep books of account. Income is calculated on a presumptive basis and no factual basis. They need to apply only a certain percentage of their revenue, which becomes their taxable business income.

For those opting for presumptive taxation under section 44AD, their taxable income will be 8% of their total turnover or gross receipts. In the new year, the government’s tax burden has been further lowered, and thus, small businesses can enjoy more tax savings. If the small business or trader opts to use digital transactions, then the taxable net income is only 6% of deemed profits on their turnover.

Furthermore, if small business owners do their transactions in white and transparent, they will be less likely to be audited or scrutinised by the government. To qualify for these benefits, small business owners must file ITR-4 carefully.

What are some Income tax saving methods for small business owners?

Tax planning strategies need to be outlined in advance by every small business. A small business may default on specific income tax compliance due to a lack of knowledge or planning in place.

Small businesses need capital to run and expand to apply for an MSME loan. However, like many MSMEs, they are unaware that they can save on taxes on interest repayments if they take out a business loan. It is always advised to obtain advice from an expert if there is a requirement for tax planning for a new business or profession. With their professional expertise, they will help guide better how to save tax in India for business.

In addition, there are several tax-saving ways a small business can employ:

Accounting of cash expenses

Keeping track of all cash expenditures is one tax-saving idea for small businesses. The Income Tax Regulations allow businesses to claim their business expenses as a deduction, provided they keep proper records. It doesn’t matter if the owner takes an MSME loan to fund these business expenses. They will thus be able to reduce their taxable profits and save tax. Additionally, companies often pay petty expenses and unorganised labour charges in cash. If receipts are not managed or appropriately organised, businesses will not account for the same at availing tax deductions. A business owner can hire someone responsible for handling these matters and keep a log of wages and small expense payments to a better plan.

Keeping a check on the number of cash payments

According to the Income Tax regulations, if a business makes cash payments exceeding Rs20,000 in a single day to a single person, it won’t be allowed to avail tax deduction on such expense. They should therefore plan their cash payments accordingly. Now, if a small business regularly trades with a supplier and its bill is usually over Rs50,000, how should it manage these transactions? The small business can split the payment amount over several days in such a case. Additionally, they can use other payment methods such as bank transfers and cheques.

Filing returns on time

Small business owners have to file ITR-4 as per the Income Tax Regulations. Timely filing of returns has benefits, but delays can result in penalties. A few perks include deductions, carrying forward of losses, and more. If the return is filed after the due date, a fine of Rs. 5000 is imposed. Small business owners whose total taxable income does not exceed Rs5 lakh must pay a maximum penalty of Rs1000 if they file their tax return after the due date but before the last date, March 31, 2022. Moreover, business owners cannot carry forward or set off their losses. Additionally, if a small business takes out a business loan, it may deduct the interest paid on loan during the same financial year it gets accrued.

Due to the COVID situation, the government may extend the filing date. However, it is best to file it as soon as possible.

Understand depreciation benefits

The depreciation deduction can be one of the best tax-saving tricks for small businesses. The income tax rules offer tax deductions on machinery for manufacturing companies. Small business owners can also claim additional depreciation on the wear and tear of equipment on top of normal depreciation. Depreciation at the rate of 20% can be claimed in addition to the standard depreciation rate of 15% when the new machinery is put into use that year. In addition, small business owners can purchase a vehicle in their business name. This will reflect as an asset, and they will claim depreciation.

Pay municipal taxes by cheque

Under the income tax rules, small businesses can claim a deduction for municipal taxes they paid during the year from income from house property. Proper records are therefore crucial to claiming this deduction. It is better to pay by cheque rather than cash to do so. Taking care of receipts is not necessary since these are bank transactions. It is always easier to keep track of cheque expenses than cash ones. Moreover, receipts for cash payments need to be stored securely and organised not to be lost, destroyed, or damaged.

Turn the business digital

Under the presumptive taxation scheme, small businesses that accept digital payments will only be required to report 6% of their turnover as taxable income. Digitisation has ushered in an era where consumers prefer online payments to cash. From business loan eligibility to researching different lenders business loan interest rates, it is very easy and convenient to apply for a small business loan online. Moreover, the approvals also take less time than traditional loans. Along with meeting consumer demands, this is one of the popular tax-saving ideas for small businesses as of now.

Deduct tax at source

Certain payments made by businesses, such as commissions, rent interest payments, and professional fees, are subject to TDS. In the absence of this, businesses will not claim these expenses for tax deductions. As a result, businesses mustn’t forget to deduct TDS and to follow the income tax rules in that regard.

Preliminary expenses deductions

To answer the question, “How to save tax in Private Limited Company in India,” one of the best tax saving methods is to write off the preliminary expenses. Expenses incurred before the company becomes operational or before its incorporation are called preliminary expenses. Examples include registrar filings, drafting memorandum and articles of incorporation, stamp duty charges, and more. Under Section 35D of the Income-tax Rules, businesses can claim these expenses as deductions in five equal instalments over their first five years of operation. Businesses must keep track of all these expenses to claim a deduction.

Seek the assistance of a tax professional

Startups and new business owners rarely understand the tax compliances they must follow and how to save on taxes. Savings on tax expenses can be very beneficial to them in the long run. These days, many tax software systems are easy to use and can guide a person step by step. People can also plan their MSME loan repayment strategy using an online business loan EMI calculator. Alternatively, small business owners can seek guidance from a tax professional who can assist them with better tax planning and managing their expenses.

Contribution to different plans

Small business owners can avail of many deductions under Section 80C of the Income Tax Act, subject to a maximum of Rs150,000. Businesses can invest in life insurance, public provident funds, medical insurances, and more. A small business owner can take advantage of all of these tax-saving ideas.

In a nutshell

As a result of reading the above article, you should understand in detail the tax-saving tips Indian businesses can follow to reduce their tax liabilities. Even a little saving on an expense can prove beneficial in the long run for small businesses. The government is focused on simplifying tax procedures as much as possible for the ordinary person. It is always best to consult a professional financial advisor if financial questions or doubts about tax savings.