March and April are the two months in a year when everyone is concerned about saving taxes. If you are a small business owner, your need for saving money on the annual income gets more urgent compared to other people. There are expenses you may need to pay and an excess of tax cut can lead to a halt in making these payments. Just like individual tax preparation, Startup tax planning is very crucial for the growth of your business.
Higher business expenses will cut down your profits resulting into lower tax bill on the name of your company. But, if you are paying these expenses with your personal funds, then tax man has already got his share. Losing a lot of money on taxes can give major jerk to your bank account and to your business. So, before you take any desperate measures on saving tax, take a look at our article which can give you some ideas on saving taxes.
Startup Tax Planning Ideas for Startup Owners
Be Prepared in Advance:
Expenses incurred in business can be shown as a deduction against the revenue generated by the company. For example, if the expenditure is of Rs. 100 then you may save up to Rs. 30.90. So, if you want to save money, make sure you keep the record of every small and big expense made for your company. Also, as per the law, you need to keep the record of all the financial transactions related to your business for a minimum period of 6 years from the relevant date of assessment year.
Deducting Startup Cost:
If the owner has made any preliminary expense for starting up the business or extension of a new unit of the present business, then these deductions can be shown under Section 35D as per the Income Tax Act, 1961. The startup business owners in India are allowed to get exemption of one-fifth of thesucceeding expenditure in the tax. Company owners who have recently expanded their business can also show the expenses made for the new unit for redemption in taxes.
Pick Wisely – Office or Home:
Today, many startup companies find it difficult to survive in this competitive market. With the skinny profit margin and mountain size expenses, many business owners give up on their dream business. For those, who have very low profit margin should opt for working from home as it’s cost effective. But, the residential premise used as an office should be done under the law as hiding your business premises can land you in a heap of trouble. Expenses like property tax, electricity bill, depreciation, etc. can be shown as business expenses but you also need to forgo the idea of getting exemption on long term capital offered under Section 54 or 54F.
Deduction For Healthy You:
As per the Income Tax Law in India, if you are contributing by paying medical insurance premium, you can get tax benefit under Section 80D. You can show medical insurance in favor of the assesse, his/her spouse, dependent parents and children.
Systematic Records of the Utilities:
If you own a vehicle that is solely used for your business, then all expenses made throughout the year on the vehicle can be claimed as deductions while filing the tax return. If your vehicle is used for both personal purpose and office use, then claim the proportionate deduction which is in regard to business only. As per the proportionate deduction, you can claim for toll taxes, petrol, parking, chauffeur salary, depreciation as per the prevalent rate of vehicle.
Never Work for Free, Even When You Own It:
There are many options to save tax if you are paying yourself. You can opt for contribution towards statutory provident fund, non-commutable deferred annuity, approved superannuation fund, recognized provident fund, public provident fund, Unit Linked Investment Plans (ULIPs), pension schemes, and many others. All these schemes come under 80C, 80CCC and 80CCD. The total amount should be Rs. 100,000 or the amount contributes whichever is less.
Getting Family in Business:
If you want to save tax, then hire a family member in the business as it will give you tax shelter, both for the payer and the payee. The earnings of the payee can accept income of 160,000/Rs. 190,000/Rs. 240,000 per annum which won’t come under tax. The same amount can be claimed as a business expenses as it will be shown in the books of accounts. You can show these expenses in audit report to get adequate tax exemption.
Hope, these ideas will help you save tax so you can widen your business without any financial hassle.
All are really good ideas. Every startup’s or Entrepreneur’s first concern is Tax, so you have really done a good job by putting this article. Nice Job.