Depending on the business that an entrepreneur runs, she may have to pay a variety of taxes. For example, a sole proprietor may have to pay GST and personal income tax whereas a company’s director may have to pay GST, corporate tax, personal income tax etc. By proper planning, an entrepreneur can optimise tax payments. Bookkeeping and Tax services are easily one of the most challenging things to grasp. So what can an entrepreneur do to save taxes? Read on to find out more.
Hire Relatives
One very common way to reduce taxes would be to hire family members or relatives. They can be paid salaries like any other employee in the organization. If the relative has no other income, the company can pay Rs2,50,000/- a year. This essentially ensures that he is not liable to pay taxes as his income is below the threshold limit as mentioned in the IT Act, 1961. The salaries paid to such relatives is a cost to the company and is set off against taxable income, thus reducing the overall outgo.
Pro-tip Always confirms with the relative whether he/she has any other sources of income, otherwise, they will be unnecessarily taxed. Also, do check their educational qualifications to see whether they can be appointed in a salaried position or not.
Utilities
Utilities such as vehicles and phones is an allowable business expense provided it’s for business purposes. Also, parking charges for vehicles, driver’s salary, etc can be claimed. A vital point that many entrepreneurs miss out on is that preliminary expenses in setting up the business is an allowable business expenditure and can be claimed u/s 35D of the Income Tax Act, 1961. They are deductible from the taxable income for five years.
Pro-tip – If you are running your business from home, then electricity expenses, Internet charges, landline charges also can be claimed. One needs to proportionately decide what was towards business and what was personal. You can share soft copies of the bills with the firm providing bookkeeping and tax service during the new normal.
Insurance
Health Insurance premiums are allowed as a deduction u/s 80D of the IT Act,1961 up to Rs 25,000/-. If you cover your parents as well then the deduction amount also increases. Also if he invests in ELSS of Mutual Funds, a further deduction u/s 80C up to Rs 1,50,000/- is allowed.
Pro-tip – In case your spouse has exhausted their deduction limit for Insurance, you can claim the remaining amount, provided the premium amount was originally paid from a joint account.
Tax Deducted at Source
There are specific clauses under the Income Tax Act under which the entrepreneurs have to deduct TDS on the purchase of a service or product. If an individual does not do so, then those expenses will not be admissible and will be written back which will result in an additional tax burden.
Pro-tip – If the Entrepreneur is a Sole Proprietorship, not liable for Tax Audit, then TDS need not be deducted while making payments
Marketing
Marketing is a tool that is not readily used by a business as they operate under the assumption that once they get some revenue then they will make a budget for Marketing, which is a mistake. Any marketing expense done for business purposes is an allowable expense and can be claimed to reduce the tax liability.
Pro-tip – With the advent of technology, Digital Marketing can be used instead of the traditional methods of marketing.
Donation
Donation not only serves as a good deed that you do for society but also has tax benefits that reduce your tax liability.
Pro-tip – Donations deduction u/s 80G help you claim only 50% of the amount. If you want to claim 100% of the donation amount, one might donate to the PM Relief Fund or any CM Relief Funds.
Housing Loan
Lastly, If the entrepreneur has a Housing loan, the interest amount can be claimed as a deduction under the head “Income from House Property” and the Principal can be claimed u/s 80C subject to the limit of Rs 1,50,000/-
In this manner, among others, an entrepreneur can legally save his taxes to help his business. As there are several tax-saving provisions, it is only wise to make use of them. Implementing these accounting and tax-saving practices will prove to be beneficial in the long run. An entrepreneur can rely on a credible tax and bookkeeping services provider to assist with tax planning.
