How Can Private Limited Companies pay less Tax in FY 2018-19?

There is only one motivational factor for entire businesses owner – a good profit and lower tax. No matter what we think the bottom line is this, the profit is a lifeline for your company and a success ladder for the growth of the company.

But, down the line with profit tax comes side by side. No doubt we cannot avoid these taxes but yes certain tax planning steps can fill your pocket little high. Here are some tax planning tips which every Private Limited Company should follow:

1. Director’s Salary

The easiest way to save tax in the private limited company is by giving salary to the directors. As you are the founder of the company, then end of the day you are the one who is going to have the profit in the pre-decided ratio, so instead of taking profit as dividend take that part of the profit as a salary which is an allowable expense or the private company.

Let us understand this with an example –

ABC Pvt Ltd co. is earning a profit of Rs. 5 lakh which is to be divided among the shareholders in equal ratio. Further, income tax of 25% and DDT of 20.06% shall also be levied.

Hence, to avoid all such taxation and instead of distributing the profits as dividend, it is recommended to pay the salary of Rs. 2.5 lakh to each director. This will help in reducing the profits and also will avoid the DDT tax as well.

2. Preliminary expenses or Startup expenses

Preliminary expenses are usually incurred at the time of incorporation of a company like professional charges paid for drafting the MOA & AOA, cost of printing the documents, fees paid to the Register of Companies, stamp duty. They are basically borne by the founder of the company before or after the time of incorporation of the company.

In most cases, people forget to take the advantages of these expenses by bookkeeping in the books of accounts. Hence, it is recommended to enter all preliminary expenses into the company.

3. Rent Expense

There is no doubt that you must have a registered address of company at some place. It has been observed in most of the cases, that companies do not enter any rent into the books while every company manages a registered office. This is because people usually register companies at their home address and hence, do not enter any rental.

Hence, it is advised to draft a rental agreement between the company and the owner and pay the respective rent to the owner and claim the rental expenses to save tax.

4. Capitalization of Assets and Depreciation

When an item is capitalized it is recorded as an asset rather than expense which clearly means that the expenditure always shows on the balance sheet, rather than the income statement. Expenditure helps the company to generate revenues if used for a long time and after that, it depreciates it over its useful life.

However, it has been observed with various startup and small business that they buy a laptop from personal saving and has no reference to the company’s books of accounts. Hence, it is recommended to book all assets in the books of accounts and claim the depreciation expense over the same.

5. Pay salary to Family members, friends against the services received

It is a universal truth that when you start a business you need any assistance and guidance from your family members and friends, and no doubt they help you throughout your journey and they are not doing it for any hidden benefits.

But, you as a good tax planner should keep their salary as an expense in books of account which in the last bring that profit at your home again with a tax advantage.

6. Entertainment expenses

Here comes the most beautiful expense of your business, the entertainment expense. All those expenses which you incurred in throwing a success party or a house party in the course of business should be accounted. A flat discount of 25% is allowed on your entire party bill by recording them in your books of accounts.

7. Meeting expenses

Taking client to dinner, to a theatre show, or to a sporting event are the expenses that are tax deductible. Also, as for your business growth, you tend to socialize and will have a lot of meeting and visit several places. So, just don’t forget to book them in a proper manner.

Conclusion

Above mentioned expenses are easy ways for savings the tax but just booking the expense won’t work that way, the above expenses need proper documentation and planning which a professional can give and in that way the true benefit of the tax planning will be achieved. Further, don’t forget to file your ITR on time.

In case of any doubt, please email us at info@hubco.in.

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