Business start-up: Tax saving tips

Most entrepreneurs, who start out on their own, can’t continue with the same vigour all along because there are many issues that need their personal attention- and one such taxing issue is filing the tax returns and maintaining the all encompassing book of accounts. Most will argue saying that they will stream line their accounting systems once more money flows in, but this is one of the biggest calculated error that many solopreneurs tend to make.

The thing that goes against them in this case is that they get distanced from the most crucial element of their business entity, i.e. the finances. The fact that still can’t be ignored is that the entrepreneurs must always be connected to his core competency and delegate the others. But if he has well studied the route his money takes in the initial stages, he will understand the science behind keeping the business afloat. And no matter what the counter argument is, a wealthy business is a healthy business.

Gearing for action

Expenses incurred in running any business is allowed as deduction against revenues generated. This implies that any expenditure incurred by a solopreneur to the tune of Rs. 100 may save tax upto Rs. 30.90, depending upon the tax bracket to which the assessee pertains. So, a proper record of all expenses is warranted. Also, as per the prevalent laws, the records with respect to any business transaction should be preserved for a minimum period of 6 years from the end of the relevant assessment year.

Calculating start-up cost

The start-up expenses, alias preliminary expenses, are allowed as deduction under section 35D of the Income Tax Act, 1961. Start-up expenses prior to commencement of business, extension of an undertaking or in connection with setting up a new unit can be categorised as preliminary expenses. In India, one-fifth of the qualifying expenditure is allowed as deduction in each of the five successive years beginning with the year in which the business commences, or, as the case may be, the previous year in which the extension of the industrial undertaking is completed or the new industrial unit commences production or operation.

Choosing between home and office

With the competitive business scenario and skinny profit margin, working from home is very convenient and cost effective. Desire for a residential premise as office is at the discretion of the individual subject to conformity of the laws for the time being in force, but the consequences can be alarming. If a solopreneur opts for home as office in conformity with law, he can deduct the related expenses like depreciation, property taxes, electricity bills, etc. against business/profession revenues, but he has to forgo the prospect of exemption on long term capital at the time of sale of such office (residential premise) offered by section 54 or 54F.

Healthy deductions

According to the prevailing laws in India, contribution towards medical insurance premium can be claimed as deduction under section 80D. This medical insurance contribution can be in favour of the assessee, his/her spouse, dependent children or parents.

Keeping record of utilities

For vehicles used absolutely for business purpose, all expenses can be grossly claimed as deduction. With respect to vehicles used for both, personal and official motive, one can claim proportionate deduction with regard to business usage. Accordingly, proportionate deduction for expenses like depreciation (at prevalent rates), petrol, toll taxes, parking, chauffeur salary, etc. can be claimed. There is no concept similar to standard deductions in the Indian context, except for depreciation at the standard approved rate.

Don’t work for free, even for yourself

There is a wide variety of options available to claim deduction by paying oneself. These include, non-commutable deferred annuity, contribution towards statutory provident fund, recognised provident fund, public provident fund, approved superannuation fund, Unit Linked Investment Plans (ULIPs), pension schemes, etc. A variety of other deductions are available under section 80C, 80CCC and 80CCD grossing to Rs. 1,00,000 or the amount of contribution, whichever is less.

Getting in the family

The idea to hire members of one’s own family or neighbour is a tax shelter for the payer and earnings for the payee. The payee can accept income to the tune of Rs. 1,60,000/Rs. 1,90,000/Rs. 2,40,000 per annum, as the case may be, without paying tax. The same can be claimed as business expenditure by the solopreneur, provided that in case of assesses required to get books of accounts audited in compliance with laws for the time being in force, a brief detail of payments made to relatives is to be supplemented in the audit report.

(With relevant tax regulation related inputs from CA Sumit Arora)