Attention all small business owners! Want to boost your profits and take your business to the next level? Then listen up! The key to unlocking your business's full potential could be as simple as reducing your tax bill. In this weekly newsletter, we'll be sharing insider knowledge on the top income tax saving tips specifically designed for small businesses in India.
Every business, large or small, is subject to income tax laws, and everyone wants to minimize their tax liability. From deductions on investments to depreciation on assets, these strategies will help you keep more of your hard-earned profits in your pocket. So, take a few minutes to read on and discover how you can maximize your profits today!
Tackling TDS
Deducting Tax at Source (TDS) is a process by which a portion of the income earned by an individual or business is set aside and paid directly to the government as tax. Small business owners in India are responsible for deducting TDS on certain types of payments made to their suppliers, employees, and contractors. This includes salaries, commissions, professional fees, and rent.
● TDS rate varies based on payment type and recipient's tax status
● Small business owners must obtain a Tax Deduction and Collection Account Number (TAN) for deducting TDS.
● TDS must be deducted at the time of payment
Option to choose Presumptive Taxation Scheme
The government has set up special tax provisions for small businesses and professionals in India. These provisions are known as "presumptive taxation schemes". Under sections 44AD, 44DA, and 44AE of the Income Tax Act, small businesses and specified individuals, Hindu Undivided Families (HUFs), and partnership firms (except LLPs) are not required to maintain detailed records or provide a factual basis for their income. Presumptive taxation scheme under Section 44AD is available for businesses with an annual turnover of up to INR 2 crores
Claim Depreciation on Fixed Assets
Depreciation is a tax-deductible expense that can be claimed on fixed assets such as machinery, equipment, and vehicles. This can help reduce your taxable income and lower your tax bill.
Let’s take an example, consider a small manufacturing business that purchased a new machine for INR 5 lakhs. Over the next 5 years, the machine is expected to depreciate by INR 1 lakh per year. The business can claim INR 1 lakh as a tax-deductible expense each year, reducing their taxable income and lowering their tax bill.
It's important to note that the rules for claiming depreciation vary based on the type of asset and the year it was acquired. Small business owners should consult a tax professional or refer to the Income Tax Act to determine the applicable rules and ensure compliance.
By claiming depreciation on fixed assets, small business owners can take advantage of a valuable tax saving opportunity and maximize their bottom line.
Purchase assets through the business
If you need to purchase new assets for your business, consider doing it through the business instead of personally. Purchasing assets through your small business can be a smart way to save on taxes. This can include fixed assets such as machinery, equipment, and vehicles, as well as other expenses such as office supplies and software.
For example, consider a small consulting firm that needs to purchase a new laptop for one of its employees. By making the purchase through the business, the firm can deduct the cost from its taxable income and lower its tax bill.
Consider leasing instead of buying
Leasing assets such as office space or vehicles can be an effective way to save on taxes as lease rentals are tax-deductible. It’s a smart way for small businesses to save on taxes while also meeting their equipment and vehicle needs. By taking advantage of tax savings and choosing the right leasing options, small business owners can invest in the growth and success of their company.
Leasing can also offer other benefits for small businesses:
● Flexibility to upgrade to newer equipment or vehicles as needed.
● No need to tie up cash or other resources in the purchase of an asset.
● Potential for lower monthly payments compared to loan payments for purchasing the asset.
Utilize bad debt
Bad debt refers to money owed to a business that becomes uncollectible, such as a customer defaulting on a loan or failing to pay a bill. Small businesses can also save on taxes by taking advantage of bad debt deductions.
Under the Income Tax Act in India, small businesses can claim a bad debt as a tax-deductible expense under Section 36(1), invariably reducing the taxable income and lowering your tax bill.
Here are some handy tips to keep in mind:
● Keep accurate records of all bad debt to support the deduction
● Consult a tax professional for guidance on the tax treatment of bad debt
● Consider taking steps to minimize bad debt in the future, such as implementing better credit policies or offering flexible payment options
Keep track of liabilities
Make sure to keep a track of all your business liabilities, such as loans and outstanding payments. This can help you claim tax deductions on the interest paid on loans.
Bottom line
Saving on taxes doesn't have to be a daunting task for small business owners. With these practical tips, you can take advantage of various tax deductions, exemptions, and other tax-saving opportunities to keep more of your hard-earned money in your pocket.
Grab your favorite beverage, sit back, and pat yourself on the back for taking the first step in maximizing your tax savings. After all, who doesn't love keeping more of their hard-earned money? Happy tax savings!