Preparation of taxes: Things every small business owner should know

A tax is a mandatory amount that governments all over impose on individuals and businesses to spend on their various schemes. Taxes are stressful for a small business owner. After working so hard, they don’t feel that it is fair to give the government a fair chunk of that. But, relax! Help is at hand. In this article, we will show you lots of ways to prepare and save taxes.

Even after the implementation of GST, the taxation system in India is complex as ever. Tax planning is important to all, and especially to a small businessman. It is an important part of financial planning, and if done rightly, can save you large amounts of money. It is important to have a good accountant to navigate the financial waters at the end of a fiscal year.

Small businesses in India are usually run as either small companies, or partnership firms, or proprietorship concerns. Many small businesses fail because they don’t have a proper tax strategy. When the time comes for filing the returns, many small business owners are at a sea, due to the lack of proper documentation. They find it difficult to keep a record of their invoices, sales receipts, and bank statements, thus losing track of their finances.

Limited Liability Partnership (LLP)

Limited Liability Partnerships (or LLPs), are a special kind of partnership and are incorporated through the ministry of Corporate Affairs. They are a separate legal entity and have to file Income Tax Return by 31st July if a tax audit under section 44AB is not required. If the accounts are to be audited, then the date is extended to 30th September.

The Government of India has strict measures in place for curbing black money and tax evasion. It has also provided some special concessions for small businesses and companies. After setting up a small business, the owner must learn about the taxes which are relevant to his business.

Permanent Account Number (PAN)

To file IT returns for your small business, you first need to get hold of a Permanent Account Number (PAN). If your business is a sole proprietorship business, then your personal PAN will be required.

Taxes for small businesses

If you are new to accounting, you might not be aware of the various taxes for small business. A business tax return is basically a statement of income and expenditure of the business. Most small businesses like retail shops, contracting firms, and trading firms are sole proprietorship businesses.

The most common small business taxes are:

• Personal Income Tax: If you run your business as a sole proprietorship, you have to pay personal income tax on the money you earn. This means that your other income like income from interest, or from house property, has to be stated on the same return.
• Payroll Tax: As you expand and hire employees, you have to withhold some taxes from their salaries. This is called payroll or withhold tax.
• Goods and Service Tax (GST): Once your aggregate tax reaches a certain level, you have to pay GST on the goods or services that you provide.

ITR Form for a small business

In this year’s budget, the government has lowered the rate of tax under the presumptive scheme for small businesses and traders. ITR-4 is for a small business whose turnover does not exceed Rs 2 crores. It is calculated on a presumptive basis. The business owner usually does self-assessment and pays tax accordingly. Under this scheme, the eligible assesses does not have to maintain any books of accounts and has to declare 8% of its gross receipts as taxable income. If the receipts are through a bank draft or electronic payment system, then the taxable income reduces to 6%.

The aim of this scheme is to give relief to small business owners from auditing and book-keeping requirements. This scheme can only be availed by proprietorship concerns and partnership firms.

The corporate tax rate for companies less than or equal to Rs 250 crores is 25 percent. For those companies with a turnover above Rs 250 crores, the rate is 30 percent. For a particular financial year, if the total revenue earned by a company exceeds Rs 1 crore, then a surcharge of 5% is levied on that company.

If you are not aware of the tax-saving strategies, you can end up paying a significant amount to the government every year in taxes. A small company, having a good tax strategy and the right financial plan, can forecast correctly and be successful in its business.  A small businessman can save tax by following the tips given below:

1. Hire an accountant

Running a small business requires accurate bookkeeping. So, you should hire a good accountant who knows all the taxation laws well.

2. Pay municipal taxes electronically

Many small business owners pay their municipal taxes in cash and do not keep proper records of the same. So, this does not get reflected in their account books. If you pay it digitally, you can claim the proper deductions against your income.

3. Properly record business expenses

Many small businesses in India primarily pay their various expenses in cash. Studies show that in the small-scale manufacturing sector, as much as 40 percent of the labour wages are paid in cash. Due to a lack of a proper accounting system, many of these expenses are not recorded in the account books. So, the company loses out on the tax benefits.

It is important to maintain the accounts properly. You can hire an accountant even on a part-time basis, to help in maintaining the records. Or, you can buy accounting software and learn to do it yourself.

4. Tax planning

Tax planning covers income and expenditure, accurately and timely filing your taxes, and making tax-saving investments at the right time. This will help you to get all the applicable tax benefits, and you can save a substantial amount of money.

We share some tax planning tips for small businesses below:

• Take advantage of all applicable deductions: You should claim all deductions that you are legally allowed. For this, you must maintain a record of all expenses.
• Choose the right business structure: The different types of business structures like a company, an LLP, or a partnership firm offer different tax advantages. For example, companies have to pay a Dividend Distribution Tax of 16.609%, but it is not applicable for LLPs.

5. Go to a tax consultant

Tax preparations services help small businesses manage all their central, state, and local tax returns. They also help them to make informed decisions, avoid tax liabilities, and save taxes. So, if you want to ensure that your taxes are handled properly, you can go to a tax preparation consultant.

These experienced consultants can handle any accounting or tax issues and can help to prepare and file the taxes on time.

6. Claim depreciation on new machinery

As a small business owner, you can claim an additional 20 percent depreciation on new machinery installed during the current financial year. This provision is only applicable to the first year of new equipment or a machine’s operations, under Section 35 of the IT Act. This 20 percent can be claimed as an expense incurred.

7. Write-off start-up or preliminary expenses

The Income Tax Act under section 35D allows small businessmen to write off their start-up or preliminary expenses in five equal instalments, from the starting year of their businesses. This refers to the capital expenditure that a business owner incurs to start his business. These can include costs incurred for market surveys, feasibility and project reports, and construction expenses.

8.  Take Tax Benefits

If you are an entrepreneur, you can avail of the benefits extended to small businesses under section 44AD, by going digital.

9 . Do correct valuation of your stock

If your stock has a short shelf life, you should value it on the principle of Net Realisable Value (NRV) or cost, whichever is lower. NRV gives the actual realisable value of stock and keeps its valuation in check, thus reducing prices.

10. Distribution of profit to partners

If your partnership firm is making profits, and all the partners decide to distribute the profit among themselves, then any individual partner will not have any tax liability.

11. Deduct TDS

There are certain transactions that require you to deduct the tax at sources, such as payments made to a freelance employee, or commission to an agent.

12. Employ your relatives

Smart entrepreneurs often employ their spouses or children in their firms in various capacities. This is a very efficient way to save taxes since you can write off their salaries as business expenses.

Small businesses should get smart in tax planning if they want to move into the big league. As a small business owner, you should keep yourself updated on all the latest developments in the financial world, especially related to government pronouncements on taxes.

Also read:

1) Why Do We Pay Income Tax in India? Importance, Applicability & more
2) Provisions for Income Taxes in India Applicable for Salaried People.
3) How To Pay Income Tax Online? Step-By-Step Guide.
4) The USA vs India: Taxation System

FAQs

Q. I am a small business owner. How much should I set aside for tax?

Ans. Typically, 30-40 percent of the total income goes into paying the state and the federal taxes.

Q. Why is it important to deduct taxes at the source?

Ans. If you have received any service from someone, it is important to deduct tax at the source. Otherwise, it will add to your tax burden. The entire payment you have made will be exempted from your taxable profit.

Q. How much cash payment is allowed on daily basis?

Ans. As per Income Tax Rules, a cash payment of more than Rs. 20,000 is not allowed. It is advisable to make payment exceeding Rs.20,000 via cheque or electronic mode.

Q. Why do we have to file an income tax return?

Ans. Filing an income tax return is as important as paying the tax as it helps to get several benefits. It facilitates carrying forward the losses on income consecutively for 8 years. But you can avail of this benefit only if you file ITR on time.