The most feasible way to lower the income tax bill is to ensure claiming all the tax deductions available to the entrepreneurs. Tax planning is a very integral part of running a business. A considerable amount of money can be saved every year through proper tax planning. Changing the tax season from a less than exciting time of the year to incentivizing the year and making tax filing more bearable tax deductions help in taking advantage of potential savings. A tax deduction is a deduction of expense from the taxable income, and it is derived by subtracting the number of expenses from the taxable income.
Lowering the tax liability by reducing the taxable income tax deduction is an incentive for taxpayers. Small business owners must take advantage of itemized tax rather than a standard tax deduction. Below is the list of write-offs commonly available to the sole proprietor for self-employed businesses. Some of them can be business-based, and some can be a personal deduction that a sole proprietor should be aware of.
Complete List Of Tax Deductions Method
1. Travel and stay: it is a very common activity for business owners to travel for business purposes. This is more
extensive when the owner has branches spread across various cities. So while booking a ticket for travel and accommodation, it should be done on the company’s account and not from the personal account
as this is considered a business expense that can be deducted from the company’s taxable income.
2. Medical insurance: The premium paid up rs 25000 which are made towards medical expenses for medical insurance
are can be claimed for deduction under section 80D of the Income Tax Act, 1961.
The spouse’s parents and children can be covered under this. It is not applicable if the entrepreneur is holding a full-time job side by side and is being provided medical insurance coverage by the employer.
3. Donation fund: Donating monetary relief to someone does not only provide relaxation and satisfaction of a good deed but also has got tax benefits. These donations should be made to registered charities and funds like the PM relief fund. Donations can also be made to a recognized political party for claiming tax benefits.
4. Depreciation: Small business owners of the manufacturing sector are given additional benefits for tax. Companies (under section 35 AD) who install new machinery and equipment can claim upto 20% additional depreciation over a year and regular depreciation of the year they were put to use.
For example, if a business purchases new machinery and claims normal depreciation of 15% and has not claimed additional depreciation of 20%, then they will have to pay taxes on the unclaimed 20%.
5. Tax deducted at source: Specific clauses under Income Tax Act where if the entrepreneur purchases a service or a product, a tax is deducted at the source while paying the seller. If the entrepreneur does not benefit from it, it becomes an additional tax burden. For example, while making a payment of rs 200000 as Commission to an agent, if the owner forgets to deduct the tax at the rate of 10%, the whole rs 200000 will not be determined for taxable profit.
6. Advertising and Promotion of Business: The cost of advertising and promoting the brand for entrepreneurs is fully deductible, and this can be in the form of:
- Hiring someone for designing a business logo
- The cost associated with printing business cards or brochure
- Sending invitation cards to clients
- Launching a new website
- Setting up a social media campaign
- Organizing an event
- Online media
7. Bank charges: Business owners should always keep their accounts and credit cards separate from business. Bank charges on transfer fees, overdraft fees, or monthly service fees are deductible.
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8. Food and beverage: In general, 50% of food and beverage costs qualify for the deduction. It must be an expense of ordinary and necessary part related to business; the meal has to be standard and not lavish, the business owner must be present at the meal. Meals such as ordering food for dinner when the team is working till late at night qualify for a 100% deduction. Meals provided at office parties or picnics are also qualified 100% deduction
9. Business insurance: Deductions available for the premium paid for business insurance like property coverage insurance for furniture, building or equipment, coverage over liability, group Health Insurance, Health Insurance, workers compensation coverage, Automobile in insurance for a business vehicle, Life Insurance covering employees of the company, insurance that covers lost profit due to fire or another cause.
10. Labour on contract basis: If a business hires freelancers for an independent contractor, their fees are deducted as a business expense. If you need help understanding the tax deductions and other technicalities you can hire income tax consultant who would help you deduce how much tax you have to pay and how can you save some.
11. Education and skills upgradation: These costs are fully deductible if they add value to the business and increase the expertise. Some useful skills and education expenses are as follows:
- Classes are held to improve the skills in a particular field.
- Webinars and seminar
- Publications and subscription on professional grounds
- Books printed for upskilling.
- Workshop held to increase the expertise and skills.
- transportation expenses for attending classes
Though any education expenses that are outside the realm of the business does not qualify as a business tax deduction
12. Business rent: If the property is rented, the lease or rental payments can be deducted from taxes. Also, if a business is run from home, it is entitled to deductions.
Various types of home business expenses that qualify for deductions are mortgage interest, interest, insurance utilities, repairs, and depreciation.
13. Office supplies: Office stationery like paper, pen, staples, or boxes are eligible for deduction under Income Tax Act.
14. Furniture and equipment: Office furniture and equipment like printers, paper, or cleaning products also qualify for deductions.
15. Software download: If the software is downloaded or a subscription is purchased for the business, they can claim tax deduction under other common business expenses or other miscellaneous expenses on the Schedule C Tax form.
16. Bad debt is when the money lent to an employee or vendor is never received back, and it can be claimed as ” bad debt”. some examples of bad debt are business loan guarantees, credit sales to the customer, loans to clients, distributors, suppliers, or employees.
17. Startup cost: Business startup cost is capital expenses as it is an investment to the business; the money hasn’t left the business but has been transformed into an asset. When deduction for capital expenses are over some time, it is called amortization, and it helps in assessing profitability over the year for the business
18. Raw material and Inventory: The cost of inventory procured or the cost of goods sold can qualify for the deduction. The inventory must be valued at the beginning and end of each tax year to determine the total cost of goods sold. Storage cost, direct labor cost, factory overhead, and the cost of the product or raw material, including freight, qualify under
expenses for the deduction.
19. Salaries of the employees: The wages of the employees are fully deductible for tax purposes which include commissions and bonuses; however, the deductions do not apply to a sole proprietor, partner, and LLC members as they are not considered employees
20. Employees’ gift: Employees’ gift is applicable for 100% deduction under Income Tax Act
21. Legal fees: While hiring a legal or professional person for the business, their fees are 100% deductible in the business book.
These were a few deductions that can be claimed by small business owners and can be benefited by the same. You can leverage this tax deductions by hiring a GST Consultant to help you out.
