Tax Planning Guide for Small and Medium Businesses

Tax planning is a highly significant aspect of running any business. In fact, it is one of the important constituents of your financial planning. Tax planning in a proper way can save you huge money. However, a businessman should adopt reasonable tax planning which is within the scope of provisions, rules and regulations of the Income Tax Act. Therefore, based on usual queries we receive from various small businesses, we have compiled a short Tax Planning Guide for Small and Medium Businesses

Tax Planning Guide for Small and Medium Businesses

 Step: 1 Choosing the right Business Structure:

The business structure may be different (i.e. proprietorship, LLP, partnership or company) and provides different tax benefits. For an example DDT i.e. Dividend Distribution tax is not applicable for Limited Liability Partnership whereas companies are required to pay DDT at the specified rate.

In the case of sole proprietorship business, the businessman may declare his business income on his personal income tax form.

Tax Planning Guide for Small and Medium Businesses
Tax Planning Guide for Small and Medium Businesses

Step 2: Understanding and Claiming all applicable deductions:

One of the basic reasons why the small businesses pay more taxes is that they don’t take advantage of all available deductions allowed under the Income Tax Act. In few cases, the owners are unaware of the available deductions.

  • A businessman should keep a record of all his expenses. The books of accounts must tally always.
  • The preliminary expenses deduction:  As per the section 35D of the Income Tax Act, preliminary expenses (expenses incurred in setting up the business) can be claimed as a deduction by the company being an Indian Resident company. Expenses like project report, preparation of feasibility report, engineering expenses, conducting market surveys etc. incurred before the commencement of business are allowed as preliminary deduction. Such expenditure can be claimed as deductions in five equal installments; each of the installments will begin with the year in which the business was commenced.
  • Business expenses: The expenses which are incurred while running the business is allowed as a deduction under the various provisions of the income tax. So, a business owner should maintain proper books of accounts to claim appropriate deductions.

Step 3: Maintain Books or Get Taxed on Presumptive Basis

Maintaining Books can be tedious affair and understanding this Income Tax Act Allows you to pay tax on presumptive basis to certain categories of Business or Professionals

You can Read About Presumptive Basis of Taxation from here

Step 4: Working Out Tax Liability

Next Step is to work out Tax Liability. This is done by adding all heads of Income and then claiming deduction allowed under Act under various schemes

Deduction under Chapter VI- such as Deduction for Savings Schemes, Medical Insurance, Charitable donations, Bank Interest etc: As per the 80G of the IT act any amount donated towards charity can be claimed as a deduction. This deduction is allowed to all kinds of the assessees i.e. even to companies. However, donations made to specified institutions and prescribed funds only qualify for the deduction.

Related Read- Check Various deductions available under Chapter VI to Plan Tax Liability

Step 5: Working out Tax liability-

After Having worked out Net Taxable Income, yo need to work out Tax Liability. The same can be read in detail from here- Working out Tax Liability

Timely payment of taxes:

The businessman must ensure that all the returns are furnished timely and accurately to avoid any penalty. Never try to evade tax but a good tax planning with the help of professionals can save your huge money even though if you hire a professional.

Maintaining Proper Books and Accounts

Maintaining all the records at all times and keeping all the receipts and invoices in a safe place can hassle free you from any future tax compliance. The books of accounts and other related documents need to be kept for a period of 6 years.

Presumptive Tax Scheme For Small Businesses

This presumptive scheme is for small businesses with gross turnover up to Rs 1 crore, now the limit extended to 2 crores. The same scheme has also been extended to professionals as well with gross receipts up to Rs 50 lakh. Any person opting for presumptive taxation scheme may declare income at a specified rate of 8% without the requirement of maintaining books of the account specified under section 44AA.

Remember to have calendar of Various dates for Income Tax Compliance’s- 

Ensure to complete compliance, some of the compliances are- Deposit of TDS, Filing TDS return, Filing Income Tax Return, Deposit of Advance Taxes etc. Check with your CA to guide you about various due dates as may be applicable in your case