As you start your company, sell your products and services, get appreciation from customers/ clients and having a great go at business. There is one motivational factor – a good profit. And no matter what we think bottom line is the lifeline for your business and catalyst for growth of your success ladder.
It’s a fact that one not just always works hard to achieve good sales figures in books of accounts. Also, no matter how higher the sale are, higher your growth is. But down the line if profits are low or god forbids no profits at all, it becomes is a negative factor for growth.
First comes sale, and then comes profit – that is the normal growth trajectory of any company. And then after all efforts when we achieve this profit, which is supposed to be distributed among the partners or shareholders, there comes taxes in tune of 30% to the government.
No doubt we cannot avoid this tax payment (and we should not, after all its for nation building), but yes certain tax planning steps during the year can give you extra monetary benefits. Here are some tax planning tips which can be adopted by every private limited company:
1. Salary to Director:
Salary to directors is an easiest way of saving tax in private limited company. As you are founder of the company, end of the day you will surely be taking out the profit from company in the pre decided ratio, so instead of taking that profit as dividend take that part as salary which is an allowable expense for private limited.
A short example over same:
For example, Let us say XYZ private limited company is making a profit of 5 lacs which is to be shared among the founder/director in equal ratio. So Instead of showing 2.5 lacs as profit-sharing; one can show salary of Rs. 2.5 lakhs to each director. The result of the same will be that taxation on XYZ Pvt Ltd will be nil as there is no profit left and also no taxation on salary also as there is no tax up to income of Rs. 2.5 lac for an individual. (otherwise there will be tax of more than 1.5 lacs in case of company).
2. Sitting fees to Director:
The new rules notified under section 197 of companies act 2013 said,”a company may pay sitting fee to a director for attending meetings of board or committee thereof. Such sums as may be decided by the BOD thereof which shall not be exceed 1 lakh per meeting of the board or committee thereof.” As per the clause (1)(ba) in section 194j of income tax act,1961, any remuneration or fees or commission by whatever name called shall be liable to be deducted @ 10%.
In a very simple words, you can also pick up your profit from company in form of this sitting fees, again the impact of same will be dual as same will save tax in company and simultaneously exempt in hand of individual under prescribed limit.
3. Startup expenses (Preliminary expenses):
These are incurred for incorporation of a company. For e.g. professional charges paid for drafting of MOA and AOA, Printing cost of documents, fees paid to ROC, stamp duty etc. There are several expenses that people incur before and after private limited company incorporation, basically which is borne by the founder of private limited company for its incorporation.
Usually most people forget to take the advantage of these expenses by book-keeping it in books of accounts.
4. Rent Expenses:
As you must have shown your registered address of company at some place. If the place is actually on rent then it’s no deal, but if the same is in name of director or in name of any relative of director then you can easily book the expense of rent in this case.
Just make a rent agreement in name of owner, start transferring rent and book rent expense in company’s book which eventually has the same impact as discussed in previous points. Here also you can book dual save of tax.
5. Capitalizing capital asset and depreciation:
An item is capitalized when it is recorded as an asset, rather than expense. This means that expenditure will appear in the balance sheet, rather than the income statement. If an expenditure is expected to help the company generate revenues for a long period of time, then you should recorded as a Fixed asset and then depreciate it over its useful life, which agrees with the matching principle.
So, of you buy an equipment for the office like laptop, printer, furniture which usually has the life of more than year, you should book them as fixed asset in book which ultimately gives you tax benefits in over the years.
6. Family member’s salary:
Whenever you start a business, you usually look for assistance and guidance from your family members and friends. In fact some family member usually help you in your business throughout your struggle and they are not doing it for any monetary benefits. But you should be good tax planner by book keeping their salary as expense in books of company which is ultimately bringing your profit portion at your home again with dual tax benefits.
7. Entertainment expenses:
Here comes a most beautiful expense of your business, after approx. each quarter , you must always celebrate your success either by throwing an in house party or hang out with your partner. So again don’t just let that expenses be free or unaccounted. Get at flat discount of 30% on your party bill by book keeping the same in books and get tax save of 30%.
8. Meeting expenses:
These expenses include taking a client to dinner, to a theater show, or to a sporting event. These expenses are usually tax- deductible. Also, as for your business purpose, you tend to socialize and have lot of meetings and visits several places. Do not forget to book them in proper manner.
9. Director’s vehicle expenses:
Company usually does not own its own vehicle and normally one of director’s vehicle is used in the business for travelling and meetings. Not just fuel but also repair maintenance of vehicle. Since the same expenditure is exclusive for business, so same should be booked in books of the company.
Above expenses are easy ways for saving 30% tax of companies. But just booking the expenses won’t work that way, the above expenses required proper documentation and planning to take a maximum and true benefit of it but that is really worthy doing.