A Complete Small Business Income Tax Guide

Regardless of the size of business you are running, you have to deal with business taxation. For bigger ventures, there are separate departments to look after it, but for small business owners, it can be draining.

Therefore, to assist you with small business tax, we have this complete guide on business taxation that intends to help you understand the complex procedure.

What is Business Tax?

In simple words, the answer to the question of what is business tax is those taxes that businesses must pay on their income. Whether you are a sole proprietor, in partnership, or a corporation, a limited liability company, your business is responsible for adhering to tax regulations laid by the government.

Tax Assessment Eligibility Criteria

Now that you know what is business tax, let’s look at the businesses that are obligated to pay the tax in India are as per the following:

• Incorporated companies in India.
• Businesses that get incomes from India and work together on those procured earnings.
• Businesses that have procured the title of being an Indian resident just with tax payment's end goal.

Tax rates

Taxes on the income is as per the following rates that are appropriate to the business houses for AY 2020-21 dependent on their turnover:

Surcharge and Cess

Suppose your annual pay is between Rs. 5L to Rs. 1 crore; in that case, you will pay an additional charge of 10% over the business's income tax. If it is above Rs. 1 crore, the additional charge will be 15%. There is likewise an extra Health and Education cess of 4%.

If you have a Limited Liability Partnership or a Firm, you will be charged at 30% of your available pay that is up to Rs. 1 crore. For a company, the assessment rate is 30%, yet if your turnover is not as much as Rs. 250 crores, the expense rate will be 25%.

How to pay small business tax?

The business's taxable income is calculated by deducting the cost of goods sold and other gross income expenses.

Step1- Know when your tax payment is due

Mostly, the last tax payment date is April 15, but now because of new provisions, you can pay your taxes 3-4 times in a year instead of paying all at once at the end year.

Step 2- Collect full information for business taxation

Once you know your tax payment deadline, collect all your documents and information like your financial records, expenses, and deduction records. It saves time and assures easy calculation of business taxation before the last day of tax payment.

Step3- Calculate Business Taxes

After collecting all the essential documents, start calculating small business tax and small business tax deductions using your financial records.

Step4- Fill in the right tax payment forms.

Before filing your small business tax, make sure you are filing the right tax form. These forms are available for free from the Internal Revenue Service (IRS).

Step5 - Rectify the errors if any

If the amount in the TDS certificate and form 26AS do not match, then take a look and rectify the errors in business taxation.

Step6- IRS verification

The last step of the ITR filing process is verification by the authorities. You have 120 days to verify your tax return file. If your file doesn't get verified, then it will be deemed as you haven't filed a tax return file.

Small business tax deductions

Usually, the small business tax deductions can vary based on your business structure. Some of the small business tax deductions are as follows:

• Salaries and wages
• Depreciation
• Rent on business property
• Insurance
• Repairs
• Commission and fees
• Legal and accounting fees
• Bad debts
• Other miscellaneous business expenses.

What is Property Tax?

To understand what is property tax, you need to know that "Property" in this term refers to all land under the responsibility of the individual and incorporates houses, places of business, and premises leased to outsiders.

Now the answer to what is property tax is that these are the taxes acquired by the government for the assets accessible to residents. The property tax rates can differ from 5% to 20%, depending upon their individual policies.

Types of Property

Calculation of Property Tax

Now that you know what is property tax let’s look at its calculation. Property tax in India relies upon the area of a property being referred to, with charges differing from one state to another. The equation utilised for calculating property tax is

Local charge = base worth × developed zone × Age factor × sort of building × class of utilisation × floor factor.  

What is corporation tax?

Corporation tax is exacted on income acquired by the organisations, regardless of whether domestic or foreign. In 2021 the corporation tax levied on income is 25% on domestic corporate, turning over up to Rs 250 crore. And 30% on turnover of more than Rs 250 crore. For foreign corporates, the tax rate is 40%.

Types of Corporation tax

The companies in India are grouped into 2 classes.

• Domestic corporate: Domestic corporate refers to companies that are incorporated and do businesses in their own country. For example- a company incorporated and doing business in India will be considered a domestic company in India but a foreign company elsewhere.
• Foreign corporate: Foreign corporate refers to companies that conduct business in a country or state other than where it is originally incorporated—for example, a company doing business in India but is incorporated in the USA.

Calculation of corporate tax

Corporate tax is processed on the net income or overall gain of an organisation. A total compensation/net income of an organisation is the aggregate sum left with the organisation after making the important small business tax deductions like:

• Depreciation
• The all-out cost of products sold
• Selling expenditure
• An organisation's income incorporates net benefits acquired from the business, rental pay, capital additions, or pay from different sources, for example, interest income or dividend income.

Net Revenue is Gross Revenue – (Depreciation + Expenses)

Tax-saving tips for business owners

• Travelling in the name of the business is a business expense.
• Taxes can be saved by making some donations.
• Showing depreciation charges
• Deducting the tax at the source
• Going for employees benefit plans
• A vehicle purchased for business purpose
• Can go for an education loan

Small business tax can be confusing and complicated. Notwithstanding, you can move into tax season with less pressure by understanding the small business tax rates, acclimating yourself with documents and necessities, and sorting out your records and information early. Having a bookkeeper in your corner can likewise give you more certainty when getting ready, documenting, and settling small businesses' taxes.

Also Read:

1) How Do Business Taxes Differ From Personal Taxes?
2) Why Do We Pay Income Tax in India? Importance, Applicability & more
3) Provisions for Income Taxes in India Applicable for Salaried People.
4) OkCredit: All you need to know about OkCredit & how it works.

FAQs

Q. What is a small business tax?

Ans. Small business tax can be considered as reserves that are paid to the state, local governments. These taxes are utilised to help the government for projects like Medicare, Social Security, public schools, etc.

Q. What is the rate of tax charged by the government by small businesses?

Ans. The amount of annual tax a business pays depends on the kind of business you have, filing status, and your business's turnover. The companies pay business taxes somewhere in the range of 10% and 37%.

Q. What do I need to give my accountant for small company taxes?

Ans. If you hire an accountant to do your assessment, it will save time and cash by collecting some significant documentation and information ahead of time.

Q. How might I save money on business taxes?

Ans. The least demanding approach to save money on business taxation is to write off your costs and take deductions that apply to your business.

Q. What tax forms do I need to fill out for business taxes?

Ans. For sole ownership or a solitary part LLC business, fill out Schedule C with Form 1040. Furthermore, for the organisation, fill Form 1065.

Q. Are Gifts for Clients Tax Deductible?

Ans. No, they are not deductible in India. Any gift received with an amount of more than Rs. 50,000 is taxable under ITA.