A small business owner may find it difficult to manage the taxes and finances of his business because tax laws and regulations are changing very fast, and it is not possible for them to stay updated with every update in law as they need to focus on their business. Hence, we have discussed some important tax saving tips for small business owners in this post so that the owners can get the benefits of that without going to any experts.
Table of Contents
Tax Saving Tips for Small Business Owners
1. Suitable business structure
Before starting a new business, it is very important to select the right business structure that suits your business and the amount you have invested. Every business structure has different merits and demerits. The business structure decides compliance, tax, and operational matters. Here is a breakdown of the different business structures and their tax liabilities:
- Sole Proprietorship: It is for a single individual who wants to start a business with his own capital; it has very little tax compliance, and the tax on this business structure is calculated as per tax slabs.
- Partnership firm: It is for two or more individuals who want to start a business with their own capital together. It has less tax compliance, and the tax on this business structure is calculated at 30%.
- One-person company (OPC): It is for a single individual who wants to start business with his own capital as a company. It has less tax compliance and ROC compliance, and the tax of this business structure is calculated at different tax rates, like 15%, 22%, 25%, or 30%.
- Limited liability partnership (LLP): It is for two or more people who want to start businesses with their own capital together. It has moderate tax compliance and less ROC compliance as compared to private and public limited companies. The tax on this business structure is calculated at 30%.
- A private limited companyis for two or more individuals who want to start business with their own capital. As a private limited company under the Company Act, it has high tax compliance and ROC compliance. The tax on this business structure is calculated at different rates, like 15%, 22%, 25%, or 30%.
- A public limited company is for two or more individuals who want to start a business, like a brand. As a public limited company under the Company Act, it has very high tax compliance and ROC compliance. The tax on this business structure is calculated at different rates, like 15%, 22%, 25%, or 30%.
2. Involvement of family members
If you are starting a new business, then you can save on costs and taxes by hiring your own family members, not having any other source of income, as an individual doesn’t need to pay tax up to ₹2.5 lacs. Hence, if you pay them a salary of up to ₹2.5 lacs per annum, then you don’t need to pay tax on their income. Also, the family members are trustworthy.
3. Digital Transaction System
In this fast-changing technology, you will need to have a digital transaction system in your business. This system provides several benefits, like if you make a payment of more than ₹20,000 for any expense, then that expense will not be allowed as a deduction while computing the net profit as per the Income Tax Act. Hence, in such cases, digital payment through UPI, debit card, credit card, or net banking can provide a tax benefit. Also, the digital transaction allows you to track expenses and transactions even if you lose the physical document for any payment.
4. Track all expenses
If you have started your new business, then you should track all the expenses, even if they are very small in amount. The higher the expenses, the lower the net profit, and the lower the net profit, the lower the tax at the end. It is also a good habit for your business if you track all the cash inflows and outflows and reconcile them at the end of every day.
5. Deductions of the Income Tax Act
Small businesses must be aware of the different deductions available under Chapter VI-A of the Income Tax Act. Small business owners can also claim deductions under section 80c for investments made in LIC, the Public Provident Fund (PPF), National Savings Certificates (NSC), and fixed deposits with a lock-in period of 5 years or more. However, the maximum deduction limit is ₹1.5 lacs per financial year under 80C. Apart from Section 80C, small business owners can also claim deductions under other sections (80D to 80U) of Chapter VI-A of the Income Tax Act, like medical insurance premiums under Section 80D.
6. Make business from home
If you are a small business owner, then working from home can be a good initiative, as it saves on rent and conveyance. So if you start your business from home, then you can save on multiple expenses like rent, utility bills, and property tax. Also, the business and owner are considered two different people, so any rent or utility bills paid by the owner for the home office will be allowed as deductions as per the Income Tax Act.
7. Take input tax credits
Whenever you buy any goods, the seller charges GST shown on the bills, which is paid by you at the time of buying those goods, and this is known as input GST or input tax credit. So if you are registered under GST, then you claim the input you paid at the time of buying the goods. Remember, registering under GST gives several benefits, like the ability to claim input GST and being considered a verified business as you are registered under the government system.
8. Depreciation Benefits
Depreciation is not a cash expense; it is a value that you have lost in your asset. If you purchase a mobile, its value starts decreasing, and the decreased value is called depreciation. Hence, if you have purchased any asset, like machinery, you can claim depreciation as an expense as per the specified percentage. If you have a manufacturing business like making candies, you can claim depreciation at 15% as per Section 35AD of the Indian Income Tax Act, 1961.
9. Donation
If you make any donation to a registered charitable institution like ISKON or an NGO, you can claim the deduction of that donation under Chapter VI-A of the Income Tax Act, 1961. However, to claim the deduction for the donation, you must have a proper receipt for the donation showing all the required information.
10. Filing of tax returns
If you have started a business, filing an income tax return is very important, as it is not only mandatory for you but also beneficial to your business. Filing ITR before the due date is more beneficial as it saves on late fees and interest paid due to the delay in filing ITR, and it will also not impact your record with the tax department. If someone has deducted TDS from your income, then you can claim the TDS by filing the ITR.
Read also: 10 Best Business Ideas with 5 lakh investment in India
Final Words
Small businesses always try to save money at the initial stage, as their main focus is to survive in the market. Some businesses try to operate their businesses by taking knowledge from free resources without consulting any experts, as they may charge higher fees. Hence, we have tried to provide important tax saving tips for small business owners that every small business owner needs to know to start and grow their business.
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Frequently Asked Questions (FAQ)
Basically, no business can be successful until you do proper research and get the proper knowledge about your business. If you cannot consult any experts, you can get knowledge through the internet. hence we have discussed above some important tax saving tips for small business owners to make ease for them to start their business.
No, you can start your business from home as well. Now a days, you can see that many e-commerce sellers don’t have any offices and work from home.