How can a Small Business Save Tax Legally?
A small business owner struggles to earn revenue in India. The challenges begin with finding the right clients, generating leads and clients, retaining the existing clients, discovering and establishing your brand image. But when it comes to paying business taxes, it becomes inevitable to pay them and suffer from the pain of parting with your money. We know it is damn painful, and you want to save as much money as possible while making tax-related payments.
Some factors that affect your net profit might be or not be under your control. You cannot diminish the tax responsibility, but you can certainly lower the amount. To help you save from the tax burden, lower it and handle it fearlessly, we have brought some of the effective tips to save tax legally. Yes, legally and not by any unreasonable means.
Your small business can follow these tips and keep a record of your finances and save tax easily. Let us explore these tips.
Put a restriction on making cash payments
Even in this digital age, it becomes easy to make cash payments when you have access to them. However, get rid of this temptation. If you have to make cash payments, ensure that they are not above INR 20,000. You can even split the payment if you are supposed to pay a number of suppliers. Use digital methods and cheques wisely and avoid cash payments above the specified limit.
Maintain all the receipts
If you run a tailoring business, you will have to pay for buying the materials and suppliers, pay salaries to the interns and junior staff, electricity bills, and rent. If you don’t make these payments digitally or electronically, you can land in a grave situation. Your business expenditure will not show an accurate amount, and you will be more liable to pay taxes. Hence, we suggest recording all your expenses and maintaining all the bills and receipts. We are sure this will save future tax trouble.
Adopt smart accounting systems and practices in your organization
It is a possibility that your small business enterprise is a labour-intensive one. You have hired several labourers, and you need to make cash payments to them (yes, the daily or weekly wages). It becomes a headache to record all the expenses, and we know your accounting department will have to bear the daily burden of the same. It happens that some entries are ignored, and your expense account shows a higher profit margin, which is certainly not expected and is inaccurate. Hence, it is high time to take recordkeeping seriously and implement some of the smart systems and practices for your accounting department.
You can sign up for a free or reasonably paid accounting software and free your staff from the daily responsibilities. It will be easy to record the daily wage payments, and if anything is missed out, tracing it will not be much of a hassle.
Use cheques for paying municipal taxes
When an entity pays municipal taxes by cash, the possibility of seeking a receipt is lost. Moreover, you can witness an accurate record of the said payment in your cheque book and passbook. Hence, claiming the deduction is pretty easy, and you don’t have to stress about the same.
Certain payments will require the business enterprise to deduct the tax at the source. For instance, you might hire a freelance digital marketer to take care of the online marketing aspects of your business. Or you will have to make payments to a business agent for procuring certain rare raw materials. If TDS is not deducted during such transactions, claiming rebates is a tough job. Always keep a record of such transactions and ensure that tax is deducted at the source.
Important tips for manufacturing units
You could be manufacturing tyres or cold-pressed oils; you need to know about depreciation cuts. Under the Income Tax Act, manufacturing units receive a tax deduction for the machinery depreciation cuts. In addition to the regular depreciation (15 percent), you can also claim another depreciation cut of around 20 percent. So, you need to grab these massive savings, and to keep a record of all the machinery-related costs and depreciated value is essential.
File returns consistently
Filing returns as per the timelines are mandatory and useful as you can grab some of the benefits. You can set off or carry forward the income losses only when your returns are filed appropriately and legally.
Prefer to buy business vehicles
You can use your personal vehicle for your business. It could be a food truck business, or house removal service, or a mobile auto repair service. But if you use your personal vehicle, you cannot claim depreciation for the same. But if you purchase a business vehicle and use it for the said purpose, it becomes easier for you to claim depreciation. Hence, be wise and invest in a good business vehicle and seek the tax benefit.
Hire a consultant
Lastly, it is better to consult a professional than to experiment with tax-saving remedies available on the internet. No matter how savvy you are financially and technically, saving tax could be a problem and needs to be dealt with properly. Hence, we suggest hiring a qualified and professional consultant who can take care of your business taxation matters easily. You can shortlist and assess some of the tax consultants in your area. However, you can land on scams if you are not cautious in the process.
The right consultant is not always the one with higher qualifications or maximum charges. They are the best if they help you save taxes from the first instance itself. They should use the legal practices that can lead to tax savings effectively and not land your business entity in a hot soup. If you find one, you are 100 percent fortunate.
In short, small business owners can save taxes legally with these simple yet powerful tips and with the help of a good consultant.
Depending on the type of business structure you have chosen, you may need to pay income tax, self-employment tax, payroll taxes, and state and local taxes.
There are many strategies to save on taxes for a small business, such as taking advantage of tax credits, deductions, and deferring income. Additionally, establishing and contributing to a retirement plan can also help you save on taxes.
Yes, there are many tax incentives available for small businesses, such as the Small Business Administration’s Small Business Investment Tax Credit and the Qualifying Small Business tax credit.
Depending on the type of business you own, you may be able to deduct expenses such as travel, marketing, advertising, rent, and business expenses.
Yes, if your family members work for your business then you may be able to claim tax deductions for their wages. However, you must make sure that the wages are reasonable for the tasks they are performing and are in line with industry standards.
The amount of money you need to set aside for taxes will depend on your projected income. Your accountant or financial advisor can help you calculate the amount you need to set aside to cover your taxes.
As a small business owner, you can take deductions for jobs-related expenses such as uniforms, travel, and equipment. Additionally, you may be able to deduct employer-sponsored health insurance payments.
Yes, in some cases, you may be able to deduct a portion of your home expenses from your taxes. In order to qualify for this deduction, the office must be used exclusively and regularly for conducting business.
Yes, forming an LLC is an effective way to reduce your tax burden as an LLC allows you to pass certain expenses, such as payroll taxes, on to the owners instead of the business.
Yes, there are many tax credits available for small businesses, such as the Small Business Employer Tax Credit and the Research and Development Tax Credit. Consult a qualified tax advisor to find out if your business qualifies for any of these credits.