20 Tax Saving Tips For Small Business Owners & Startups

Written By Sushma Singh

Every penny counts, especially when you are a business owner. Now, these taxes can churn out a lot of your hard-earned profit. So, what should you do? Follow the 20 tax saving tips for business owners and startups mention in the article to save more.

Two important concepts lie in the above statement, tax-saving tips, and Startups. If we need more businesses and Startups in the economy, then there should be a motivation to do so, and one of them is tax savings or tax planning. There are various ways through which an entrepreneur can achieve the above objective.

Tax Saving Tips For Small Business Owners & Startups

Income From House Property

The income from the property which is either self-occupied or let out. Various methods through which we can avoid unnecessary taxes are:

1.Benefits of availing loan: Income tax act gives benefits to the business owners or entrepreneurs who have taken a loan for the construction or repairs of the property. The assessee can avail tax deduction under section 24(b) according to the income tax act and claim the principal amount under section 80(c). The deductions under section 80(c) are limited to INR 1,50,000. The income from house property can be set-off against other heads of income.

2. Municipal taxes deduction: People tend to pay municipal taxed by cash, wherein they cannot enjoy the benefit of the deduction, whereas if they pay through cheque, then the income tax act allows a deduction and can be claimed accordingly.

Income From Business Or Profession

The income from the core business and activities of the entrepreneur. This is one of the most important topic under which we will see various methods to save tax for small business owners and startups:

1.Record of cash expenses: The major part of the economy is unorganized. Thus a labor-intensive economy wherein the business deals with daily wages a labor charge. If these expenses are not recorded judiciously, then the business will show a huge income, which in return will result in higher payment of taxes. Thus, the cash expenses should be recorded properly in the book of accounts.

2.Valuation of stock: According to the accounting standard, 2 stock is calculated on the principal of cost or net realizable value whichever is lower. Normally stock is valued at the cost, but the principle is used for perishable goods. The net realizable value is the value, which will be realized after deducting all expenses; thus, stock can never be overvalued.

3.Depreciation: Income tax provides additional depreciation under section 35AD. In any manufacturing enterprise, if new machinery is installed in the middle of the year, the company can add in the depreciation of the machinery in the present depreciation amount. A total deduction on capital expenditure was also introduced by the finance ministry. The concept of additional depreciation was amended to promote or encourage the private sector investment in public infrastructures like hospitals, infrastructure, highways, and cold storage. Normal additional depreciation stands at 15% per annum.

4.Deduction at source: The income tax act mentions that the service receiver or service buyer has to deduct tax at source while making payment to the service provider or the service seller. If such expenses are not paid, then they become a burden on the taxpayer and increase the tax to be paid by the assessee. For example, a commission of INR 3,00,000 is received by the service receiver, and he forgets to subtract the deduction at the rate of 10% then the tax will be applicable on the whole amount and not on the net amount which increases the amount of taxes to be paid by the assessee.

5.Cash payments: Businesses should avoid paying cash more than INR 20000 to a single person in a day. If cash is paid more than 20000, the income tax act disallows any kind of deductions from the taxable income.

6.Deduct incomes that are taxable in the hands of others: While the total profits have to be calculated, then the interest has to be added back. Such incomes are exempt under certain sections under the income tax act and if you fail to make a claim against such income under any other head of income. For example, interest income has to be taxed under the head income from the other sources. Section 80 TTA of the income tax act allows a deduction of interest on savings interest income up to INR 10,000.

7.Filing income tax return on time: If the assessee files the income tax return on time, then the income can be carried forward or set-off against other income heads. Business income losses can be carried forward for a maximum of 8 years and can claim a deduction for 8 years. But it should be kept in mind that the losses can be carried forward only when the income tax is filed on time.

Income From Capital Gains

1.Long term and short-term capital gains: Whenever any kind of capital asset is kept for more than 36 months, then it is termed as a long-term asset, and profit on the sale of such assets is long term capital gain. Any asset sold within 36 months is a short-term asset, and the profits arising from the transaction is short-term capital gain. Short term capital gain tax is flat 15%. For equity shares, debentures, units of UTI, zero-coupon bonds, equity-oriented mutual funds, for long term asset, the holding period is 12 months instead of 36 months.

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2.Indexation: This concept is based on the time value of money. For example, an asset’s value 5 years back was 100; then, it would not be INR 100 at present. The change is the time value of money. An asset was valued at INR 10,00,000 in 1998. When sold in 2019, the assessee fetched INR 25,00,000, thus accordingly, the long- term gain is INR 25 lakhs- INR 10 lakhs, which is 15 lakhs but indexation plays an important role while calculating the gains. The cost indexation index is announced by the finance ministry to calculate the indexed cost.

3.Mutual fund SIP: In a SIP, every installment is considered as a separate investment and a new investment; thus, after the first installment again, 12 months starts, and STT has to be paid on that amount outstanding to be paid. Short term capital gain tax is charged at the rate of 15% per annum.

4.Exemption from capital gains: If the proceeds from the sale of the asset are invested in the assets specified in the income tax act. Section 53 to section 54H provides an exemption of capital gains. Section 53 of the income tax act exempts capital gain arising out of the sale of residential house and section 54EC provides for the exemption of capital gains arising from the sale of capital assets from the sale of government bonds of public sector undertakings.

Also read: 40 Ways to Save Income Tax Legally in India (2020)

Deductions Under Section 4

1.Life insurance premium: Life insurance premium paid is claimed under section 80C along with other deductions subject to a maximum cap of INR 1,50,000.

2.Investment in a public provident fund: PPF investment avenue is one of the most lucrative options to invest because of its high-interest rates. The investment in PPF also gives benefits in terms of deductions up5to INR 1,50,000 under section 80C along with other deductions. Interest in the public provident fund is not taxable, unlike the interest on fixed deposits.

3.Medical insurance premium: The claim deduction of INR 25000 is given against the medical premium paid for the spouse, children, parents, etc medical insurance.

4.Hire services of an expert: Many people tend to pay higher taxes because of the least knowledge of taxes and deductions. Several business owners and entrepreneurs complete their books of accounts nearing the end of the financial year.

5.Pay advance taxes: Paying taxes in advance can give huge benefits to the taxpayers.

6.Interest, fees, and penalty: Ensure that the tax manager or the chartered accountant is updated about the penalties, fines, and charges levied on any kind of violations. For example, for filing an income tax return, the return has to be filed on before the 7th of every month. If they don’t file the return on time, then certain penalties have to paid by the taxpayer.

7.Startups expenses: These expenses can be preliminary expenses or secondary expenses. These expenses are the ones that are made before the commencement of the business. These expenses are deductible under section 35D of the income tax act, 1961, from the taxable income. These expenses should be deductible for over 5 years.

Bonus Tips: 

  • Rent paid for the office premises: Several Startups take office premises on rent, and the expenses are deductible as business expenses under the income tax act regulations. If the start-ups own the land and pay property tax, then there is a deduction from the taxable income.
  • Expense on hotel/travel: entrepreneur can write-off all the expenses made on restaurants, hotels. These expenses are used for business meetings, conferences, or seminars.
  • Utility expenses: Utilities such as electricity, internet, water, and telecom contribute major of the expenses. These expenses can be treated as business expenses and can write-off these expenses over some time.
  • Charitable donations: the business gets a tax break when they start donating more. Section 80G of the income tax act gives benefits or exemptions for the donations made by the company.

I hope you have enjoyed this article and might have learned a few tips on tax saving for small business owners and startups. If you still have any queries then feel free to ask them in the comment section.

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Sushma is a full-time blogger and financial expert. Join Sushma and 10,000 monthly readers here to learn how to save and invest your money wisely.

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