Tax Planning for New Business : 7 Money Saving Tips

In the past decade, India has witnessed immense advancements in the startup industry. It has proved to be a boon for the Indian economy.

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But no business becomes a Unicorn overnight. There needs to be deep understanding of finances and taxes for startups to become unicorn. Hence these tax panning tips for new buisnesses might come in handy

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Every entrepreneur has to face the challenge of navigating the income tax rules. Now you might wonder why it is a burden when everyone must pay taxes?

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To begin with, taxes levied on businesses are much higher than what an individual has to pay. You might not even see profit during the beginning phase, yet you must pay taxes.

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Apart from this, managing the taxable and non-taxable incomes and filing tax returns and GST may seem confusing to a first-time business owner.

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One slip and you may end up paying penalties, compensation charges, and so on, which undoubtedly puts undue pressure on your revenue and profit.

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Therefore, you must have some handy tax-saving tips to reduce your tax liability. You can also consider these Smart Tax Saving Investment options to reduce the Tax Burden.

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1. Include business utility expenses in your return files

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When you run a new business, there are some unavoidable expenses that, as an entrepreneur, you have to bear. For instance, broadband – when you run an online business, the internet is a must.

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Similarly, electricity – you can’t run a business in the dark, can you? These are considered business utility expenses. According to the Internal Revenue System (IRS) guidelines, you get a tax exemption against your utility expenses.

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But remember, these necessities must be used to operate your business, manufacture products, or offer services.

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Utility expenses are categorized into three primary types:

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1. Preliminary expenses: These are the expenses you make before launching your startup under section 35D of Indian Income Tax, 1961. It may include legal charges for drafting MOA/AOA, incorporation fees, brokerages charges, underwriting charges, etc.
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2. Convenience expenses: These could include phone bills and vehicle bill documents.
   
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3. Regular expenses: These are charged when working from home for paying electricity bills and broadband charges under ‘Head of the Company.’

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2. Incorporate medical insurance 

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According to Section 80D of the Indian Income Tax Act, you can claim tax benefits on medical insurance worth ₹25,000, provided you are the primary policyholder.

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However, there is a catch! You cannot claim a medical insurance premium for deductions if you already have a full-time job and business. You can only use this benefit to save money on taxes when the business is your first and prime employment.

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For a joint early-stage startup, all the members need a medical insurance plan to enjoy the tax exemption benefit. The employment rule applies to your business partners as well. 

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3. Always deduct taxes at the source

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When you buy something or opt for a third-party service for your business, you must deduct 10% as tax at the source. Failure to do so will disavow the entire expense recorded on the bills. You may have to pay additional tax as a penalty.

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For instance, if you have hired a recruitment firm to hire employees and are to make a ₹4,00,000 payment for their service, you must charge 10% TA. Otherwise, the entire ₹4,00,000 will become inadmissible and increase your tax burden.

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4. File the tax returns on time as a New Business owner

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No matter what industry your startup belongs to, you must file an income tax return on time. Failure to do so will levy huge interest on the total taxable income.

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Besides, late submission of the tax filing documents may result in your business getting red marked by the income tax department.

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As a result, if you are in the middle of getting funding, you may risk losing the investor because no one wants to do business with a red-marked entity.

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The income tax department may also file a lawsuit against the startup. This may affect your reputation until the total due amount is paid off and the legal case is closed. If you do not know the process for filing taxes, seek help from a professional.

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5. Document every transaction made under the New Business

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Always record the transactions you have made under the business name. This way, all the transactions will be recorded properly in one place.

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Failure to do so may cost you a significant deduction while filing the tax return. So, making payments through bank wire transactions and cheque books is best.

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If you are making a cash payment, ensure you get a receipt. Remember, you can make a cash payment of up to ₹20,000 per day.

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Besides, you can easily include all taxable incomes to lower the tax amount, regardless of how meager the deduction is.

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6. Taking loans for tax exemptions

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You can easily buy a home on loan and use the interest you pay to save taxes from your business revenue under Section 80C of the Income Tax Act.

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For example, your house loan is approximately ₹30 lakhs, and you need to pay monthly interest of ₹30,000. You can claim tax benefits for the interest you need to repay the debt.

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7. Take advantage of depreciation

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A business deals in both tangible and intangible assets. Usually, taxes are applicable on tangible assets but not on intangible ones. But you can benefit from appropriate tax planning and knowledge about depreciating asset valuation. It is especially relevant to the manufacturing sector.

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According to this rule, if you install a piece of machinery or tool, you are eligible for 15% normal depreciation and 20% additional depreciation to compensate for the loss of value of your tangible asset. So make sure you claim that extra 20% depreciation if you want to save tax.

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Final words

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The taxes are charged cumulatively. Hence, as your business grows, so will the total tax that you have to pay. So, you should strategize smartly and plan all actions you need to perform to reduce the taxes. Now you know the major ways to reduce your tax burden for your startup business. 

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Apart from this, the tax benefits are valid for a certain period. If you miss the period, you won’t be allowed to use the tax exemplification cause in the ITR file. Also, you must ensure the tax returns are filed on time to avoid extra expenses such as compensation charges.

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Therefore, adopting these tax-saving tips from day one can significantly help you save money. Remember, every rupee saved is every rupee earned.