There is an entrepreneur within each of us, and most of us want to build something of our own someday. When you start your entrepreneurial journey, you must consider thousands of things. From ideation to setting up the business, it is a daunting task, but the satisfaction we gain from running a successful business of our own is unmatchable.
Tax planning is a very important aspect of starting any small business. With effective tax planning, you can significantly reduce the amount of tax your business has to pay. And that’s why it’s very important to explore all possible tax-saving strategies to ensure you don’t miss any opportunities to save money on taxes.
Well, paying taxes is our duty, but saving the taxes is an even bigger duty as a small business owner. Because every penny saved can be invested into your growing business and make it larger and larger!
So here are some tax-saving tips that you, as an entrepreneur or small business owner, should know!
Write-Off Preliminary Expenses
When you begin your entrepreneurial journey, you may incur various expenses while setting up your business. These are called preliminary or start-up expenses, which come under capital expenditure for starting a new business.
Section 35D of the Income Tax Act covers these expenses and allows you to write them off. Let’s say you’re starting a clothing business and spending money on market research, product samples, or initial marketing. You can deduct these preliminary expenses from your taxable income.
Consider Digital Transactions And Avoid Cash
In today’s digital world, it won’t be a wise move to make cash payments. As per the Income Tax Act, if you are making a payment of more than Rs. 20,000 in cash to an individual, it is disallowed in your account books for tax purposes.
Well, using digital transactions over cash can help you maintain clear records and also provide numerous tax benefits. When you pay your suppliers or receive payments through digital means, it gets easier to track and document every transaction, which will be helpful during tax time.
Let’s say you want to purchase fabric to make clothes. If you pay for your fabric purchases through bank transfers or credit cards, you’ll have a clear record to show for tax deductions.
Depreciation Benefits
Depreciation is another significant tax-saving tool. It allows you to deduct the cost of an asset over its useful life. Let’s say you purchase machinery or a computer for your clothing business. You can claim depreciation each year on these assets, which will reduce your taxable income.
There is also the benefit of additional depreciation, which you can avail of under Section 35 AD of the Income Tax Act. Generally, if you purchase machinery, you can claim a normal depreciation of 15%, but you can also claim an additional depreciation of 20% if you install new equipment and machinery. Also, the provision of additional depreciation is only available for factories or power generation units, not for dealers or service providers.
Hire Family Members
When starting a business, it is wise to consider hiring qualified family members as a potential tax-saving strategy. You must ensure that you pay them salaries, which can be shown as deductible business expenses. This will potentially reduce your taxable income and can be considered one of the best tax-saving strategies for small businesses.
Use Home Space as Office
It’s not a bad idea to save on rental expenses when you are just starting your business. If you can use a part of your home exclusively for your business, you can claim a portion of your home expenses as a business deduction. This includes rent, mortgage interest, utilities, and maintenance costs.
For example, if you convert a room in your house into your clothing design studio, you can deduct a percentage of your home expenses based on the space used for business. But you have to ensure you have proper documentation, and a clearly defined workspace is essential to support your tax-deduction claims and avoid scrutiny from the tax authorities.
Submit Timely Tax Returns
Submitting timely tax returns is the most important part of the tax planning process. Filing your taxes on time can help you avoid penalties and interest charges. Plus, it shows that you’re responsible and compliant with tax laws.
For instance, if you consistently file your tax returns by the deadline, you won’t have to worry about late fees eating into your profits.
Medical Insurance
Medical insurance for yourself and your employees can also help you save on taxes. Health insurance premiums are deductible expenses under Section 80D of the Income Tax Act, which can reduce your taxable income.
For example, if you buy health insurance for yourself and your staff, the premiums paid can be claimed as a deduction, which can offer tax relief while ensuring everyone’s health and safety.
Don’t Forget To Deduct TDS
It is really important to deduct tax at source (TDS) as per the income-tax guidelines on payments made for goods or services required for your business. If you fail to do so, your entire expense will be disallowed for tax deduction, which will lead to paying higher taxes.
For instance, if you pay a consultant Rs.50,000 to design your clothing website, you should deduct TDS before making the payment. It will ensure you comply with tax laws, avoid penalties, and can claim expense deductions.
Consider Donations
Making donations to charitable organisations can also help you save on taxes. Donations to certain approved organisations are deductible expenses under Section 80G of the Income Tax Act.
For instance, if you donate a portion of your profits to a local charity, you can claim a deduction for it, which will reduce your taxable income.
Also Read: Navigating the Process: Swift Responses to ITR Non-filing Tax Notices
Conclusion
As true citizens of this country, we must abide by all the laws and regulations. It is no different for business. A rupee saved is as good as a rupee earned, so why miss out on that? By rightfully implementing many tax-saving strategies for businesses, we can save enough money. And we can use this money to grow our business.
Frequently Asked Questions (FAQs)
I use my home space for running a business. Can I deduct any expenses?
Absolutely, yes! If you dedicate a specific area of your home for business use, you can proportionately deduct a portion of your rent, utilities, and internet costs. Remember, you must have clear records and a well-defined workspace to avoid issues.
I travel a lot for work. Can I deduct those expenses?
Of course, you can deduct that. Travelling for business is a deductible expense, so you do not have to worry.! Whether it is flight tickets, accommodation meals, etc., you can claim these as deductions. But you must make sure to book these expenses through your company account and maintain proper records for documentation purposes.
What’s the most important thing I can do to save on taxes?
Any laws and regulations rely on only one thing, which is physical proof and evidence. You need to keep good records of every small document in your business! Because of that, only you can claim deductions and save taxes. Receipts, invoices, and clear bookkeeping will make your tax season easy.