Tax Planning tips and strategies for New Businesses
Every individual, LLP, HUF, partnership firm, corporate, AOPs, BOIs, and they are liable to pay taxes on time. Tax planning is an important part of every small business. With appropriate tax planning, you can save a significant amount of money each year for your business. However, for this, you have to know the various provisions available under Indian tax laws.
Payment of taxes is illogical. On one hand, it cuts down the take-home income as well as puts control of the standard of living, particularly on expenses. On the other hand, it also supports the government in financing its several initiatives and programs for the people of the state. For example, there are a lot of initiatives for startups introduced in India if you have opened a new business in India.
In that case, it is all the more essential to do tax planning for your new business properly so that you get the maximum advantages of the available tax deductions and exemptions. Before you settle and involve in your new business and its operations, it is important as a business owner to get some clarity on tax planning. You should know about conditions that you should factor in if you are planning to or have just set up a new business.
Tax Planning
Tax planning is a structured financial method that seeks taxation options. It considers when and how to do business to avoid or lower taxes.
As mentioned, with taxes being a liability for every individual, discharging taxes on time becomes crucial for getting the maximum deductions. If you have settled a new business in India, tax planning for business becomes important as it will help you save handsome financial resources in a way that is not only judicious and permitted but is allowed by the tax authorities themselves.
New businesses are an important part of the growth, progress, and development of the country. These new businesses generate further income, employment, investments, and optimal use of resources. Therefore, it is equally vital that these new businesses are well-supported and guided. The Income Tax Act, of 1961, which governs the tax rules and regulations of the country, has many such options in the form of investments, deductible expenses, exemptions, turnover particulars, and many more, which can help businesses reduce tax while jointly contributing to the growth and development of the economy.
Here are a few of the various advantages of tax planning for a new business. Let us discuss in detail the meaning, benefits, and various methods by which a new business can plan taxes efficiently and optimal tax savings.
Role Of Tax Planning In Starting A New Business
For new businesses that are to be settled in India, tax planning is essential. The importance of tax planning has increased as a result of the increasing market competition and the effects of the pandemic. Tax planning for a new business benefits business owners and entrepreneurs in achieving their financial goals. A business not only must invest a significant amount of money to operate, but it also requires keeping a positive cash flow.
Insight Tax Planning For Businesses
Insight business tax planning is highly essential as it is a crucial part of financial management. Tax planning means using your resources efficiently and smartly such that the tax liability could reduce. It is efficient and strategic planning of expenses, investments, operations, and other methods to reduce or minimize the tax liability of the business.
Tax planning for businesses in India would empower businesses to undergo a lower tax liability by claiming exemptions, tax benefits, and multiple forms of tax deductions. It is a financial analysis to plan from the perspective of taxation.
Advantages of Tax Planning in Business
If new businesses do not take enough care about proper tax planning and/or pay less or no taxes to the Government of India, then it will give a negative impact on the growth and development of the country. The government meets a shortfall in finances, which puts a new tariff on the citizens.
On the other hand, strategic tax planning that allows the efficient use of financial resources and reduces the tax liability of the company through different types of deductions, exemptions, investments, and benefits gives financial leverage to the business as well as the government.
- Efficient tax planning makes sure the smooth functioning of the business.
- Tax planning saves the business protected against legal mandates and hassles.
- A business can considerably lower its tax liability using a strong tax planning strategy. The money saved on taxes can be utilized for amazing investments.
- Additionally, tax planning guides businesses to save money. For the new business, these savings can be beneficial.
- Tax planning will assist businesses in optimally utilizing tax credits and concessions efficiently and accurately.
Tax planning is a vital part of every small business. With the correct tax planning, you can save a significant amount of money each year for your business. In this article, we shall discuss some tax planning strategies that can go a long way in benefiting your business.
1. Conduct Comprehensive Research
Tax planning and savings are tough to implement and involve a lot of complications. Research on taxation laws, regulations, and modifications is first required, which will help you get a lot of valuable knowledge. Any tax planning consultant may also be of help to you.
2. Select The Correct Business Structure
According to the MCA (Ministry of Corporate Affairs), various types of business entities operate in India. For example, OPC, Pvt. Ltd., LLP, Sole Proprietorship, etc. The tax slab rates that are in effect for different categories of businesses vary by the Income Tax Act, 1961, of India. You can successfully reduce your taxes by opting for several company registrations including a Private Limited Company, a Sole Proprietorship, and One Person Company.
Choosing the right business structure will help you lower your tax liabilities and extend your tax planning strategies. In this way, selecting an insight into the tax liability of the business structure will help you in implementing effective tax planning for new businesses.
3. Write Off Preliminary Expenses
At the inception of your business owner journey, you may arouse certain costs while establishing your business. These preliminary or initial expenses come under the category of capital expenditure for setting up a new business. Section 35D of the Income Tax Act allows you to write off preliminary expenses (say, R & D, a market survey, or engineering expenses) as a deduction, in five equal installments, over the first five years. Under Section 35D, the maximum deductible cannot be more than 5% of the project cost.
4. Track Business Expenses
The most important aspect of planning is to keep a record of the areas where you must invest and spend money. Through accurate bookkeeping, you can keep a record of this information, which will be beneficial for better cash flow management and tax savings.
The Income Tax Act permits small businesses to claim deductions on expenses involved while running the business on the revenues generated. This means you can lower your tax burden by availing of appropriate tax deductions on all your business expenses. However, for this to be possible, you must record all your business transactions and expenditures with transparency, diligently, and systematically.
5. Additional Depreciation
The Income Tax Act permits you to claim an additional reduction of 20% on any new machinery installed during a year. This provision provides benefits for specific industries mentioned under Section 35AD. It applies only to the new machine’s operation during the first year.s operation.
6. Avoid Penalty For Late Filing
You should avoid late fees and enhance tax savings for the business when you file your income tax returns or do GST filing as per government regulations as per the due dates.
There are definite deadlines when it comes to tax filing in India. As a responsible business owner, you may wish to submit your tax returns before the due date. Otherwise, you may have to pay a penalty. It is not only important to maximize your tax advantages; you must also ensure that you utilize your fund smartly.
7. Establish A Home Office
Many business owners start their businesses by using their houses as a location of business. If you set your home as the principal office for your business, you can reduce your tax liability by claiming a deduction on expenses related to your home office, As per Sections 32 and 37 of the Income Tax Act, owners can claim deductions on the expenses that are related to office costing, utility bills, property laws, and mortgages.
The growing Indian economy and the availability of manpower must pave the way for a new business’s incorporation to go smoothly. But if you wish to run a business successfully, you should opt for tax planning. It is difficult to surpass the competition and expand in the market as the market expands more competitively.
8. Make a Retirement Plan
Nevertheless, regarding your plans to retire, You must structure a planned and timely exit strategy at the earliest stage of your business. As the owner of a small business, the most admired part of your net worth is infused equity in the business.
Though, depending wholly on your business your retirement strategy may not be wise. You may wish to plan in advance for uncertain times by keeping aside some income regularly in a retirement account. Or select a specific plan for retirement. This can help you lower your tax liability now while planning for a comfortable future later.
9. Look For Professional Help
The Indian tax laws can sometimes be quite tough to know. There are many sections and subsections and further subsections of those. If you are a beginner, determining the tax liability in India could be difficult.
A dependable professional that can help you measure your business through the many distinctions of the tax code can prove to be an invaluable resource. An experienced tax expert advises you on more than just tax filing; they also provide calculated, proactive recommendations on how to take maximum advantage of your deductions. Discuss with your tax professional regularly to get an insight into the opportunities to lower your tax liabilities.
10. Pay Your Municipal Taxes By Cheque
You should always pay municipal tax by cheque. Payment of municipal taxes on your business premises by cash can result in the loss of receipts. In addition to this, paying municipal taxes by cheque permits you to claim a deduction.
11. Actively Record Cash Expenses
Although new businesses are growing in India, Various of them is working in the unorganized sector where the wages of laborers get paid in cash. Such kind of indirect wages accounts for at least 30-40% of your functional expenses. As such, proper tax planning for business can never be implemented if in a business at least INR 50K is paid, which is not tracked or recorded erroneously in the absence of a proper cash or day book.
Conclusion
In addition to the above-said strategies, there are some other strategies also. These include deducting tax at source (TDS). You can avail of a deduction for depreciation as well. Under the Income Tax Act of 35AD, if new machinery is installed in a manufacturing company, there is a provision for additional tax exemptions.
As a legal taxpayer in India, it is important to abide by the laws and pay the right taxes when you start a new business. That means you can take benefit of all the available tax deductions under the provision of the law. By planning your taxes wisely, you are able to save a considerable amount of money in the end.
Answer Covered FAQs and People Also Ask
How can I save on my taxes in 2023?
What is tax planning in respect of new business?
Why is tax planning necessary for new businesses?
What are the three types of tax planning?
What are the strategies for tax deduction?
Some of the important strategies for tax deductions are as follows:
- Utilizing correct depreciation and additional depreciation
- Accounting policies, methods, and planning
- Record through entity taxes
- By utilizing all charitable considerations
- Reporting foreign assets with transparency and accuracy, if any.
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