Entrepreneurship is the new thing and we all love that adrenaline rush. One of the major problem that startups and entrepreneurs face is of managing tax filing. Most entrepreneurs know about the basics of tax filings, but only few are aware of the differences and best practices to be followed. As a result, many startups pay too much tax or get into completely preventable tax problems.
Related Article: 11 Financial Apps That Can Take Your Startup To The Next Level
In reality, tax compliance isn’t that difficult. There are a few things that needs to be followed that will not only help save but will also help structure your business. You can make the tax aspects more efficient by keeping in mind just a few things, and you’ll be done!
- Maintaining books of accounts: Your idea will get you places. It’s the next big thing and you can feel it! At the same time, it’s very important that you maintain your company’s books and build a financial history. A stitch in time saves nine. These days most banks and financial institutions refer to the ITR record before extending credit. You may want to seek professional help early on to gain visibility on your cash flows and to ensure compliance.
- How to address business losses? Your team has just started off, and it may be a while before the business starts earning profits. That’s totally normal. In case the business has incurred losses, it’s more important and beneficial to timely file tax returns. Business losses are allowed to be carried forward for 8 assessment years and can be set off against the business income.
- What is mine and what is yours? Often business and personal expenses get intertwined. You may want to use a different bank accounts right from the start. This helps in clear distinction between the expenses that your business can claim and the ones it cannot.
- Preliminary expenses: Expenses which are incurred before a business is formally set up are called preliminary expenses. Such expenses may be claimed as a deduction starting the year in which the business commences. Examples of such expenses are- legal professional consultancy, CA advisory services, procurement expenses etc. Keep a record and claim away.
- Evidence: Each year’s accounting records must be kept for a period of 6 years from the end of that year. Ensure that proofs and receipts of transactions are stored carefully. Details of assets purchased, rent agreements and all other documents must be safely kept as well. This helps should the Department’s Assessing Officer (AO) ask for it at a later stage.
- Know the deductions that help save: Startups must take benefit of certain Section 80 deductions which are available for newly set up companies. For instance, Section 80ID allows 100% of business profits deductible for 5 years; this is specifically for the new hotels/convention business centres set up in the prescribed locations. It is equally important to check if any other laws are applicable to the startup such as filing TDS returns, provident fund, service tax payment, VAT payment, etc.
- The ITR forms vary for different assesses. For instance ITR-4 is applicable for individuals or HUFs who have income from proprietary business or are carrying on a profession, ITR 4S is applicable for income earned from a presumptive business and ITR 5 is applicable for partnership firms.