Synopsis: With the economy under pressure from soaring inflation and supply chain disruptions, it has become difficult for small businesses to remain profitable due to margin pressures. In such a scenario, businesses should look for ways to minimize their costs – employing income tax saving tips (strategies) is one such method. 

Irrespective of their size, all businesses in India are liable to pay taxes on their income. Since tax payments can grow to significant amounts, it becomes pertinent for small businesses to minimize their tax liability.

Taxation Rules for Small Businesses

Small businesses are subject to an income tax levy of 8% of their total turnover/gross receipts u/s 44AD under the ‘Presumptive Taxation’ regime if their total turnover does not exceed Rs. 2 crores. This levy is reduced to 6% if the business owner is amenable to accepting payments digitally. 

Undoubtedly, with such rules, the tax liability for small businesses can add up to a considerable sum. So, how can small businesses save on their taxes legally and protect their cash flows? We list a few methods below.

Income Tax Saving Methods For Businesses – 9 Strategies To Follow

1. Maintain Proper Records of Expenses

Under taxation laws, businesses are eligible to claim their expenses as deductions. But the expenses need to be recorded and documented in line with the accounting laws. 

Many small businesses prefer hiring their family members and close relatives to claim their salaries as expenses. This additional salary cost can be set off against total income, thus reducing the tax outgo.

Small businesses can also claim travel and accommodation expenses as business costs, especially if their business operations are spread across different cities.

2. Record Preliminary Expenses

Business owners incur a lot of expenses during the incorporation of their enterprise, including stamp duty, registrar filings, and charges for drafting memorandums and articles of association. These are known as preliminary expenses and are tax-deductible under Section 35D of the Tax Act for five years, subject to 5% of the project cost. 

As per section 35D, business owners can claim deductions on expenses that were incurred before the commencement of the business. Similar deductions can also be availed on expenses incurred for the extension of the business or for setting up a new unit after the commencement of business.

3. Income Tax Savings from Depreciation 

In addition to charging normal depreciation to Profit & Loss accounts, companies operating in the manufacturing sector have the provision to claim additional depreciation expenses under Section 35AD. This section allows small businesses to claim up to 20% additional depreciation on new equipment and machinery, which has been installed over the year.

Furthermore, businesses can also claim wear and tear of their vehicles as a depreciation expense, thereby reducing their taxable income even more.

4. Correctly Deduct TDS

Some of the payments made by small businesses, such as commission charges, rents, interest payments, professional fees, etc., are subject to TDS (tax deducted at source). If a business fails to deduct TDS on these payments, then it can no longer claim such expenses in its accounts. This can result in a higher tax burden for the business so be very careful about your TDS claims.

5. Track Your Cash Payments

When cash payments exceed Rs. 20,000 for any transaction, say a salary payment, then small businesses cannot avail of any tax deduction on such expenditure. Hence, it becomes imperative to track your payouts and ensure that any outgoing cash is split into smaller sizes that do not exceed Rs. 20,000 at any given time. Alternatively, small businesses might prefer making digital payments.

6. Go Digital

With more and more consumers becoming tech-savvy and looking for ways to pay digitally, it has become vital for small businesses to offer provisions for digital payments. A Dun & Bradstreet India survey has highlighted how 82% of small businesses that were surveyed have digitalized their operations in the aftermath of COVID-19.

Such businesses that accept digital payments can now report only 6% of their turnover as taxable income, under the presumptive taxation scheme, thus reducing their tax liability significantly.

7. Make Donations

By donating to registered charities and funds, like the Prime Minister’s relief fund, small businesses can claim deductions under Section 80C of the Income Tax Act. Donations can also be made to a recognized political party to claim tax breaks. These deductions are limited to a maximum of Rs. 1,50,000.

8. Housing Loans

If a small business owner has linked their PAN card with the company, then they can claim a deduction under section 80C of the Tax Act for interest payments on home loans. Additionally, small businesses can also deduct municipal taxes from their taxable income. These taxes should be paid by cheques.

9. Hire an Accountant 

Maintaining books of accounts as per taxation rules can be a cumbersome process. Small businesses should consider seeking professional advice to ensure a better computation of their taxes. Accountants can also help small businesses by providing tactical recommendations for reducing tax liabilities. As per Income Tax Rules, small businesses need to file their tax returns under the ITR-4 form. An accountant would ensure timely filing of your ITRs so you can enjoy perks in the form of carrying forward losses, which can be set off against capital gains and taxable income.

Wrapping Up – Save Tax To Grow Your Business

Small businesses should utilize income tax-saving tips that have been introduced by the government to cut down their expenses and ease margin pressures. These income tax savings tips will help in saving money which can then be funneled back into the business to invest in growth opportunities. Remember, a rupee saved is a rupee earned. Don’t forget to conduct adequate tax planning!