A small business incurs many expenses, from stocking inventory, and repairing machinery, to managing payroll for daily working capital needs. As small business owners, they have limited cash flow and capital. Moreover, their revenue is less, so they also require financial support from lenders in times of financial crisis. Either they borrow, or they can take out business loans. Hence, they need to manage all the expenses very carefully. One such expense is tax outgo. It also needs to be managed well so that cash flow is conserved and can be re-invested fruitfully in the business.
Big or small, every business is subject to income tax laws, and everyone wants to minimize their tax liability. So, the main question is how to save tax on business in India? So here are some tips for saving on income tax.
A small business or profession is provided with special sections in Income Tax Rules by the government. These are called "presumptive taxation schemes". Under presumptive taxation sections 44AD, 44DA, and 44AE of the Income Tax Act, specified resident individuals, resident HUF, a resident partnership firm (except LLP), and small businesses are not required to provide detailed accounts or maintain books of account. Income is calculated on an estimated basis and has no factual basis. They are required 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 would be 8% of their total turnover or gross receipts. However, if the small business or merchant chooses to use digital transactions, the taxable net income is only 6% of the profit of their business.
Furthermore, if small business owners transparently conduct their transactions, they will be less likely to be audited or scrutinized by the government. To qualify for these benefits, small business owners must carefully file ITR-4.
Keeping track of all cash expenditures is a tax-saving idea for small businesses. Income tax regulations allow businesses to claim their business expenses as deductions, provided they keep proper records. It does not matter whether the owner takes an MSME loan to meet business expenses or not. Thus, they will be able to reduce their taxable profit and save on tax. Additionally, companies often pay small expenses and unorganized labor charges in cash. If receipts are not managed or properly managed, businesses will not account for them to take advantage of tax deductions. Business owners hire accountants to handle these matters and keep a log of wages and small expense payments for better planning.
As per Income Tax rules, if a business makes cash payments of more than Rs 20,000 to an individual in a day, it will not be allowed to avail of a tax deduction on such expenditure. So, they should plan their cash payment accordingly. Now, consider a small company that regularly does business with a supplier whose bills exceed Rs 50,000. In such a case, the small business may split the payment amount over several days. Additionally, it can use other payment methods like bank transfer and check.
Small business owners must file ITR-4 as per the Income Tax Regulations. There are benefits to filing returns on time, but delays can result in penalties. Some of the perks include deductions, carry forward of losses, and more. If the return is filed after the due date, a penalty is charged. Additionally, if a small business takes out a business loan, it can deduct the interest paid on the loan during the same fiscal year that it accrues.
The depreciation deduction can be one of the best tax-saving methods for small businesses. Income tax rules offer a tax deduction on machinery for manufacturing companies. Small business owners can also claim additional depreciation on 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 in that year. In addition, small business owners can purchase vehicles in the name of their business. It will show up as an asset, and they will claim depreciation and consequently tax benefit.
Under the income tax rules, small businesses can claim a deduction for municipal taxes paid during the year from income from house property. Hence proper records are important for claiming this deduction. It is better to pay by cheque rather than cash to do so. It is not necessary to keep track of receipts as these are bank transactions. It is always easier to keep track of cheque expenses than cash expenses. In addition, receipts for cash payments need to be stored and organized securely so that they are not lost, destroyed, or damaged.
Under the presumptive taxation scheme, small businesses accepting digital payments would be required to report only 6% of their turnover as taxable income. Digitization has ushered in an era where consumers prefer online payments over cash. From business loan eligibility to researching business loan interest rates from various lenders, it is very easy and convenient to apply for a small business loan online. In addition, approvals take less time than traditional loans. Along with meeting consumer demands, it is one of the most popular tax-saving ideas ever for small businesses.
Certain payments made by businesses, such as commission, rent interest payments and professional fees, are subject to TDS. In its absence, businesses will not claim these expenses for a tax deduction. As a result, businesses must not forget to deduct TDS and follow income tax rules in that regard.
One of the best ways for a small company to save on tax is to write off the initial expenses. Expenses incurred before the incorporation of the company or before its incorporation are called initial expenses. Examples include registrar filings, drafting memorandums and articles of incorporation, stamp duty charges, and more. Under Section 35D of the Income Tax Rules, businesses can claim these expenses as a deduction in five equal instalments in the first five years of their operations. Businesses must keep track of all these expenses to claim the deduction.
Small business owners can avail of multiple deductions under Section 80C of the Income Tax Act, up to a maximum of Rs 150,000. Businesses can invest in life insurance, public provident funds, medical insurance etc. A small business owner can take advantage of all these tax-saving ideas.
You should understand in detail, the tax-saving tips that Indian businesses can adopt to reduce their tax liabilities. Even small savings on an expense can prove beneficial in the long run for small businesses. The government is focusing on making the tax procedures as simple as possible for individuals and businesses.
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Elina Brooks | January 16, 2023
Thank you for informing us that it is required for small business owners to file ITR-4 as per the Income Tax Regulations if we want to avoid penalties that may cost a lot for our business.