Being a small business owner or an entrepreneur, you take every possible step to save taxes. Remarkably, the taxes paid on the income of the year can take away as much as twenty-five per cent of your entire profit margin. So, it will be a smart move to consider taking some necessary steps before filing taxes besides making your business look profitable on paper.
We know that doing business has become more stringent and complicated due to various legalities and complex laws. Not to mention the fact that self-employed taxes are different compared to filing a personal tax return. This requires you to be more aware of tax saving options and how a significant portion of your hard-earned money can be saved. Below I have shared a few tax-saving tips that will not only save your yearly taxes but will maximise your investments and show good profits on paper.
Tax saving tips from petty expenses
Make Business purchases
If you need to buy office equipment’s or other office supplies, buy at the year-end to claim the items for tax-write off. For example, you can purchase pens, pads, new paper ream or anything that can fulfil your business purpose. During the year-end, you may find many attractive schemes and discounts available at stores because of stock clearance sales.
Write of returns smartly
It is appropriate to write off all your returns as they can never be claimed as income. Items that have been returned and had been issued against a refund counts like a loss against the income acquired by you. Thus, make a proper track of all your returns and refunds smartly in your accounting books or software. For safety, you can review the exchanges and refunds every six months. If you keep waiting for the year-end, the invoices for the refunds might get lost or replaced somewhere else.
Claim benefits of Housing Loan interest
Many people usually avoid taking bank’s financial assistance for house building. The fact is availing of home loans proves beneficial in several ways. From tax POV, you can easily claim an interest like a deduction from house property besides claiming deduction under section 80C with other deductions.
Use cheques for paying municipal taxes
Municipal taxes which are paid yearly can be claimed as a deduction from gross income from the house property. Many people avoid taking tax receipt and pay municipal taxes in cash. But, making such payments with a cheque can help you in claiming the deduction even if you have lost the receipt. The tax receipts will be reflected in your bank statement too.
Tax saving tips from income generated from a profession or business
Recording cash expenses appropriately
Most of the business is labour intensive where wages usually remain unorganised and labours are paid in cash. Indirect wages and factory floor expenses account for not less than 40% of the entire manufacturing expenses. Recording such expenses inappropriately can result in high profits due to the under-recoding of expense. Consequently, this results in paying high taxes. Therefore, proper receipts with either a thumb impression or a signature form the labour must be maintained in the wage register to claim proper deductions.
Finding Stock Valuation
Stock is mostly valued at its cost price, however, the stock that has a shorter life must be valued on the principal basis or NRV, whichever is less. Net Realizable Value or NRV will give you the actual value that can be realized from the stock. This will further prevent the stock from getting over or under valued that ultimately reduces taxes. But the practice of the stock valuation must be consistent all over the year to avoid undesired attention of income tax officers.
This tax-saving tip is very useful for manufacturers. Income tax provides various benefits to the small and big manufacturers like additional depreciation for specific business falling under section 35AD. For manufacturing companies, if a new machine is purchased and installed during a year, then along with normal depreciation, the units are eligible to claim depreciation up to 20% in a year when the machine is being used first. Likewise, under section 35AD, a total deduction in capital expenditure is allowed for those businesses who are engaged in a specific business listed under the section. The main intention behind such provisions is to make more private firms invest in infrastructures such as highways, cold storage and hospitals.
Deduct tax at source always
Many transactions have been specified under the Income Tax Act that needs the service buyer or the receiver to deduct tax at source when paying the service provider. If the buyer or the seller fails to do so, such expense turns inadmissible and increases the tax liability.
Avoid making Cash payments
To run a business, we need to buy various goods and equipment’s throughout the year. Ensure that goods or office supplies bought for more than twenty thousand rupees is not paid in cash, particularly when bought in a single day and from a single person. Income Tax Act does not allow deductions of paid expenses in a day that exceeds 20,000 other than payments made in draft or cheque. However, chapter 6DD in the Income Tax Act provides some exemptions where the section is non-applicable.
Deduct income that is taxable in some heads
Some of the income such as indirect income is added when total profits are added. Many people are unaware about the same and thus the indirect income becomes taxable under the other heads even though such income has an exemption under the section. When the interest is not deducted from the books profit, one might not even know that they are paying high taxes besides failing to avail legal benefits.
Always file your income tax return timely
Income tax returns must be filed on or before time as suggested by the Income Tax Departments. This provides taxpayers with few benefits also such as carry forward losses on net business income. The annual losses from a business can be carried forward for 8 consecutive years. Thus, it can be set off against next years income if the same is not set off from the current year’s income. Nonetheless, the advantages of carrying forward the loses can be availed only if the income tax is filed on or before the return date. This is the reason tax officials always advise people to keep tax payment date in mind and make prompt payments and filing of income tax.
Tax Saving tips from Income from Capital Gains
Know about short term and long-term capital gains
Many business owners would fail to acknowledge the difference between different kind of capital gains. Also, many of them are unaware of the core concept behind the short term and long-term capital gains. Capital assets that have been held for 36 months or more fall under long capital gains and selling off such assert can arise long term capital gains. Similarly, anything that is sold within 36 months of purchase falls under short term gain and can be taxed differently. But then, long term capital can be categorised variously according to the section.
Mutual Fund SIP
It can be assumed that Mutual fund representatives might never show the correct picture behind proper taxing or the tax treatment of Mutual fund SIPs. They will keep on urging that if the Mutual fund is kept for more than 12 months, then only the capital gain will be exempted. However, this is only half true. The fact is when you start a new SIP, every instalment is regarded as an individual investment.
Tax Saving tips from deductions made on investments
Life insurance premium
Life insurance schemes are made in a way that not only provides security to your home and office but provides effective returns on investments made. One more benefit is that if you pay a life insurance premium for yourself, for your children or spouse, whether you are married or not, it can be claimed under section 80C with another form of deductions up to a pre-cap limit.
Tax saving from PPF
Public Provident Fund is one of the oldest and most secured social security deposit schemes offered by the government. This not only provides the applicant with a lucrative rate of interest just like the interest of fixed deposits but offers tax deduction up to a certain limit under section 80C. Although interest on fixed deposits made in banks remains subject to tax but PPF interest are provided with tax exemptions under section 10.
Medical or Health Insurance Premium
Health and Medical Insurance plans are provided by various insurance companies. The premium paid on medical insurance for self, spouse or any of the family member falls under tax exemption. Under section 80C, a person will get tax deductions on the premium paid up to a certain limit.
If you hire an accountant who is not well-versed with the latest terminologies or new tax structures, you may end up paying more than the required taxes. Improper or no planning made on tax can also lead to the same. Thus, we would always recommend the hiring of experts who can assist you throughout the year and guide you on how taxes can be saved efficiently.