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Tax Planning Strategies for New Businesses

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Taxes can be a little confusing for individuals, but when it comes to businesses, well, let’s just say it’s a whole new level of complexity. Running a business in itself is hard. One has to juggle so many responsibilities and with taxes in the mix. It can be a bit of a headache for sure. Now, if you want your new business to spread its wings and grow, efficiency is key. Every rupee you save counts, and that’s where tax planning comes into play. Through tax planning services, you can unlock the maximum benefits from the available tax deductions and exemptions in the Income Tax Act. This is especially important for young businesses as money saved can fuel business expansion. So in this blog, let’s understand what Tax Planning for New Businesses is and figure out why it’s so important. We’ll also look at some tax planning strategies that can help your new business thrive. Let’s dive in!

Understanding tax planning for businesses

Everyone wants to minimise their tax liabilities, and businesses are no different. Tax Planning for Businesses is the process that helps them organise their financial structure so they have to pay the least tax possible legally. This structuring includes assessing the costs, profits, operations, investments, assets, liabilities, and other aspects to strategically optimise the overall tax burden. Businesses are important for a country’s development. They contribute to economic progress and they create employment. The government recognises their importance and provides incentives and various tax benefits to encourage business growth.

According to the Income Tax Act, businesses can benefit from many provisions such as deductions for capital expenditures, incentives for exports, favourable tax treatment for certain types of income, and more. The smartest move for new businesses is to kick off tax planning right from the start. The first few months and years are important and tax can have a huge impact on the bottom line.

Why Is Tax Planning Crucial for Startups?

  • First and foremost, tax planning makes sure that your business stays compliant with the law. Running a business is challenging enough, so the last thing you need is the hassle of dealing with the income tax department. 
  • Secondly, tax planning helps save money which helps the bottom line, which is important in the first few years of any startup.
  • New businesses often look for investors for faster growth. Investors closely look at how a business handles its taxes, so having a good tax plan can make startups more appealing to them. If investors believe that a business is handling their finances right, they are likely to see it as a great opportunity. 
  • Tax planning also makes businesses more efficient. By saving tax, they can allocate more resources to areas like expansion, marketing, and product development.
  • Some tax benefits can be availed if a business invests in research and development. This not only helps them save tax but also promotes innovation and long-term growth.
  • The first few years can be make-or-break for startups, so they need extra care and attention initially. That’s why Tax Planning for startups is crucial at this stage, as it helps them play by the rules while they reap benefits. Consulting with a tax planner early can prove to be one of the smartest decisions one can make, as it ensures smooth sailing and business sustainability. 

Also Read: Best Tax Saving Investment Plans & Schemes

Tax Planning for Small Businesses

Now, let’s take a look at some tax planning strategies that small business owners can use to reduce their liabilities legally –

Choosing the right business structure

Different business structures have different tax implications. For example, sole proprietorship of a business means that the individual owner is personally liable for taxes. On the other hand, in a partnership, all partners share the tax responsibilities. If you go for a corporation, you may face double taxation, which means that not only will you have to pay the corporate tax, but as a shareholder you will also have to pay tax on the dividends you earn. There are many structures that a business can take, such as Limited Liability Partnerships (LLPs), private limited companies, and One Person Companies (OPC). You have to understand how each structure works and what its tax implications are.

Recordkeeping and Documentation

A business has many expenses, so it’s important to keep track of them all. Similarly, it’s important to keep accurate records of your income, invoices, and receipts. Maintaining detailed financial records not only helps you claim tax deductions but also helps you understand and manage your overall financial health. This documentation can make the process of tax filing much easier and also help you in claiming the applicable deductions.

Also Read: What are Tax Planning, Tax Evasion, and Tax Avoidance?

Taking Advantage of Tax Credits and Deductions

There are many deductions in the Income Tax Act that a small business can benefit from. These deductions promote the economic growth of the country, investment, and compliance with regulations. You need to have a thorough understanding of the tax code so you can identify which deductions apply to your business. Here are some benefits available under the IT Act – 

  • If you are self-employed and use your home for business purposes, you can claim a deduction and save some tax on rent, utility bills, maintenance etc. 
  • You can claim a deduction for charitable donations under Section 80G. It allows deductions for contributions made to eligible charitable organisations, and the deduction amount varies from 50% to 100% of the sum you donate.
  • You can claim Input Tax Credit (ITC) under the Goods and Services Tax (GST) regime. It will allow you to claim credit for the taxes paid on your purchases against the taxes collected on your sales.
  • From Section 30-37, you will find deductions for expenses incurred for business or profession. This includes deductions on rent, salaries, repairs, insurance, and other expenses that are directly related to the operation of the business.
  • You can also save on taxes by deducting income that is taxable under the head ‘income from other sources’.
  • If your business is involved in exports, you can benefit from deductions under Sections 10A, 10AA, and 10B.
  • If you decide to invest in Research & Development activities, you can claim a deduction under Section 35.
  • If you are looking to make investments, you can take advantage of tax-saving options such as Equity-Linked Savings Schemes (ELSS), New Pension Scheme (NPS), and Unit-Linked Insurance Plans (ULIP) to avail deductions under Section 80C.
  • A business can also take advantage of the provisions related to depreciation, which are stated in Section 32. Assets such as buildings, machinery, vehicles, and even patents and trademarks can lose value over time due to wear and tear or obsolescence. You can claim depreciation on any such assets used for business purposes.  

There are many such deductions available in the IT Act, so staying informed about the tax laws can help you save big for your new business.

Quarterly Tax Planning

Doing your tax planning every three months might seem tedious, but it can be advantageous. This will force you to regularly assess your financial performance and give you time for adjustments. Regular tax planning also helps you to accurately estimate your annual tax liability and helps reduce stress and workload during the busy tax season because let’s face it, no one likes to deal with last-minute tax-related stress.

Collaborating with a Tax Professional

Safe to say a business owner has a lot on his plate at any given time, but tax planning is just one of those aspects of business that is better managed with professional help. A certified tax planner has years of experience and knows the ins and outs of the tax world in ways normal people don’t. They can guide you through the various tax laws, keep you updated on the changes, and help you capitalise on tax-saving opportunities as they arise. With a tax planner to take care of your tax obligations, you will be free to take care of the situations that demand your attention so you can focus on growing and developing your new business in the crucial early stage.

Conclusion

You’ve now understood the meaning of tax planning and its benefits, and you’ve seen the strategies you can adopt to minimise your tax liabilities. While you can certainly take on taxes on your own, you will find that a tax advisor can be a powerful ally in your business venture. When you start a small business, no doubt expenses pile up. Some business owners see tax planners just as another expense, but they could not be more wrong. You have to view a tax planner as an investment, and a very wise one at that. Their expert insights and guidance can truly take your business to the next level.

If you already have a business but haven’t quite fully taken advantage of professional tax planning yet, that’s fine. Even if the best time to do your tax planning was yesterday, the second best time to start is right now.