Published on Dec 27, 2021Updated on Sept 6, 2023
Businesses, whether they are small or large, managing and controlling expenses is the key to their long term sustainability and profitability. This includes steps like keeping employee costs under control, using technology to weed out unnecessary capital intensive manual processes, maintaining a good inventory turnover ratio, lowering your tax burden, etc.
Among all the methods for controlling expenses, saving on taxes can help you a lot to make your business sustainable and competitive in the market. If you are confused about how to save tax in a small business, this blog post is for you. Read till the end to know the various tax-saving methods.
You should and must record all expenses, from large to small ones, incurred towards running your business. If you fail or miss out on recording the expenses, you may end up paying more taxes on your profits.
Recording of expenses also helps you to become more aware of your business, how you are spending the money, which areas you need to focus next on improving the operational metrics, etc. Over the long term, you will experience greater control over your business, while saving on taxes.
If your business is a manufacturing business, then under the Income Tax Act, your business is eligible to claim an additional depreciation of 20% for the new machinery purchased that year, apart from the regular depreciation of 15%. And, if the installation of new machinery is under the Capex plan of the business, then under Section 35AD of the Income Tax Act, you can claim a 100% deduction on account of that expenditure.
For example, you are involved in the business of manufacturing paints and have installed new machinery, replacing the old one. In this scenario, apart from the regular depreciation of 15%, you can claim an additional depreciation of 20%. If you don’t claim the additional depreciation, then you need to pay taxes on that unclaimed 20% amount.
Under the new rules of the Income Tax Act, you cannot claim deductions on cash payments, if it exceeds Rs 20,000 in a day. The transaction will be deemed null under income tax rules for claiming deductions. It will only result in increasing your tax liability.
Therefore, if you are making cash payments, it is better to stagger it out over several days to avoid crossing the Rs 20,000 a day threshold. But, again this can lead to errors and increase your accounting work. So, the best way is to make payments using different digital banking modes like cheque, NEFT/RTGS, or UPI. Remember, a rupee saved is a rupee earned in business.
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Under the clause of the Income Tax Act, the business is responsible for collecting tax from the source whenever it is paying for the services it received from a third-party vendor. For example, let us assume you are paying Rs 80,000 plus GST of 18% or INR 94,400 to the leasing firm for the space you have taken on lease for conducting the business. In this case, you are liable to deduct 10% as tax from the source before crediting it to the leasing firm. Therefore, you need to deduct Rs 9,440 as tax which is adjusted to the recipient’s final tax liability and credit Rs 84,960 to the recipient’s bank account.
In case you forget to deduct the 10%, the entire amount will not be admitted as expenses, which will increase your tax liability significantly.
If you are planning a capital expenditure or thinking of expanding your business or facing working capital issues, you can consider taking a small business loan, providing that you fulfill all the business loan eligibility criteria.
While considering the option, always look at the interest rate on business loans to check its feasibility. If the interest rate is on the higher end, the interest cost will outweigh the benefits.
Businesses are evolving, so your ways of doing business should also evolve accordingly to respond quickly to the ever changing business dynamics. And one way that helps you to do so is through saving on costs that will make your business competitive.
The above discussed points are some of the top ways through which you can save a lot on income taxes and contribute to your business’s growth. And, always file the returns of time to avoid the penalties. One bonus tip, you can carry forward business losses for a period of up to next 8 assessment years.
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