Establishing a business can raise quite a lot of challenges for the entrepreneur or the business owner. The income tax is one of the most challenging situations for the business owner. Income tax is a direct tax levied by the government on the income of its citizens. If you earn more than 2.5 lakhs per month, you are obliged to pay income tax to the government. On average, small businesses pay 19.8 percent income tax to the government every year, according to a survey done in 2019.
Tax planning is a crucial step in every business strategy. You can save a hefty amount just by appropriate tax planning and execution. This article is for you if you’re a business owner looking for legal ways to minimize your income tax. We are going to tell you 7 significant ways to reduce your income tax for your business.
TABLE OF CONTENT
- Ethical recording and timely payment of taxes
- Registering a vehicle in the name of your firm
- Medical insurance for you and your family members
- Preferring digital payments over cash transactions
- Expenses on business trips
- Hiring a professional accountant
Suppose you are involved in a manufacturing business where your plant or factory has installed new machinery by replacing the old ones. In that case, your business can claim up to 20% depreciation in the first year, followed by 15% depreciation in the upcoming years under section 35AD of the income tax act. The government pursued this act to encourage entrepreneurs to install new machinery and upscale their small businesses exponentially.
2. Ethical recording and timely payment of taxes
Ensure that you carefully record every transaction made through your small business in the given financial year. You will pay more income tax on your profits if you miss out on any single entry made during the year.
Unreasonable accounting or late payment of income tax can lead to tax penalties which can hurt the goodwill of your recently established business. You will eventually be compelled to pay more than you had to pay earlier.
3. Registering a vehicle in the name of your firm.
Purchasing a new vehicle to carry out assorted tasks for your small business? You can make it an expense for your business by registering it in your firm’s name. Further, it will be illustrated as an asset in your firm’s balance sheet, allowing you to claim depreciation on the vehicle every year. You can increase your fixed capital and minimize the income tax.
4. Medical insurance for you and your family members.
Getting medical insurance for your whole family is a necessity in today’s age, especially after Covid 19. While protecting your family from enormous medical bills, your medical insurance is liable to tax deductions under section 80D of the income tax act 1961. You can claim up to Rs. 25000 as tax deductions in every financial year.
5. Preferring digital payments over cash transactions.
Preferring digital payment methods such as NEFT, RTGS, UPI, etc., have proved to be more convenient for tax savings as cash transactions over Rs. 20,000 are not assessed by the income tax department and are considered null. This only increases your tax liability and you will pay more income tax on your revenues.
6. Expenses on business trips.
Traveling somewhere for business purposes? Well, as long as the trip is primarily for your business, you can note down the expenses made during your trip in your books and claim tax deductions if the trip was planned in advance. Any activity involving your entertainment or leisure is not liable for income tax deductions.
7. Hiring a professional accountant.
The best option for filing income tax responsibly is to hire a professional accountant to handle your accounts. Being an expert in tax filing, he/she can suggest the most reasonable and legal ways to minimize the income tax for your small business. Keep in touch with your accountant frequently and ask him for advice or suggestions in your small business.
An entrepreneur shall bear the responsibility of being a regular taxpayer and abide by the laws of the income tax department in our country. Since you’ve reached this far, you must have progressed some understanding of income tax planning for your small business and how to minimize the taxes in the most legal way possible. Planning your taxes responsibly can supervise you to claim tax deductions in every way possible and eventually, you get to redeem a great amount of money at the end of the year.
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