It’s probably THE bugbear of the small entrepreneur - taxes! Parting with income after all the blood, sweat and tears, not to mention ingenuity and creativity you’ve poured in, is heartbreaking. But it’s an annual ritual you cannot avoid. To ease your pain, we’re offering you a quick guide that may lift a part of the tax burden off your shoulders.
While computing their tax burden, every business is allowed deductions as business expenses - or the cost incurred on setting up and operating the enterprise. Following are the nuances of some expenses that may have escaped you.
Cost of Incorporation
Setting up a private limited company involves huge costs. Registration charges, office space, printing, and the like. You can deduct all these expenses from your income. “Costs of setting up a business enterprise include printing of memoranda, Registrar of Company fees, amount paid to professionals, applying for PAN and other such costs, which can be deducted. However, you cannot deduct the entire sum in one single year and have to spread it out across five years,” explains chartered accountant Paras Savla. You must note here that the issuance of share capital is not allowed as a deduction under the cost of incorporation, Savla points out.
Expenses: While operating your business, there are other expenses that can be claimed. “Expenses such as telephone bills, staff salaries and travel for business purposes can be claimed,” says Savla. And for those who own a vehicle, there’s more good news. Mumbai-based chartered accountant Mehul Sheth says allied costs such as car maintenance, fuel costs, car insurance and depreciation on the car can be claimed as deductions. “But when you claim car expenses, you need to also declare its use for personal purpose. I personally estimate 20 per cent as my personal usage,” he reveals.
As far as salaries go, you may claim a deduction on a salary paid to your spouse. But, Sheth points out, this is legal only if she/he helps you in the business and is qualified to do so. “If she is not a part of the business and you declare that you are paying her/him a salary, you could end up in trouble for tax avoidance.”
Travel Costs: Most people travel for business purposes, even if only domestically. Travel-related business expenses include commuting to meet clients or travelling long-distances. TO claims this as an expense, you must preserve the tickets you purchase. “There is no limit on the amount that can be claimed as a business-related travel expense, unlike salaried individuals who have to adhere to LTA guidelines. However, you have to prove that the travel was undertaken for business purposes alone,” Sheth advises.
If you’re gifting diyas and chocolates to your clients and business associates this Diwali, save the receipts. Gifts too can be claimed as an ‘entertainment expense’. “Money spent on gifts can be claimed if it is in accordance with business policies and given out on occasions such as Diwali. But it has to be looked at from the reasonability perspective,” says Sheth. Savla warns, “Watch out for the recipients. Giving gifts to people involved in public policy such as Pollution Control Board officials, ministers, registrars is not allowed.”
Operating A Business Out Of Home: For many small entrepreneurs, their home is their first office. They do this to avoid paying rent and other related expenses. If you’re one of them, here’s the good part. “Part of your home expenses, say 20-30 per cent of society maintenance charges, rent and electricity can be claimed as deductions. But once you declare your home as business premises, you are exposing your home to income tax surveys, reveals Savla. Income Tax surveys or raids can be conducted only on business premises and not on residential premises. But if your home doubles as your office, the IT guys could come knocking at your door. So it is advisable to move out to an office as you grow,” he suggests.
There’s more. If you are using a spare home exclusively as your office, then the taxation changes and you can claim the entire expense as a business expense, says Sheth.
Depreciation: Apart from basic procurement costs, the general wear-and-tear of equipment and devices can be deducted against your income. “Thus, you can claim depreciation on computers, mobiles, printers, cars and other equipment. But in your income-tax returns, you will have to declare the usage of these devices for personal purposes and these will not be allowed as deductions,” says Sheth.
After excluding all these charges, the rest of your business income will be taxed depending on how your business is structured. “If it is a proprietary business, you will be taxed depending on the bracket that applies to you. If it is a partnership business, you will be taxed at 30 per cent,” Savla concludes.
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