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Tax Planning Strategies for Small Businesses

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Created on
July 18, 2023


What’s Inside

Tax planning plays an essential role in fueling the growth of small businesses. Yet, business owners, who mainly focus on marketing strategies, customer acquisitions, and operational efficiency, may sometimes ignore tax planning. This blog will explore how small business owners can plan their taxes effectively.

Why Understanding Tax Assessment and Planning is Important? 

Tax planning for business plays a pivotal role in small businesses, and it enables using the resources efficiently, which reduces tax liability. It includes systematic planning of the expenses, investments, operations and other aspects. Using tax exemptions, tax benefits, and different tax deductions is also essential as they are a part of tax planning.

Tax Planning Strategies for Small Businesses

1. Selecting the ideal business structure

Choosing the right business structure, such as OPC, Pet Ltd., LLP, Sole Proprietorship, Hindu Undivided Family (HUF), etc., enables the small business owner to minimize tax liabilities. This allows for the application of better tax planning strategies as each business structure has different tax norms. For example, HUF is given tax deductions under Section 80C of the Income Tax Act 1961.

2. Write off Initial Expenses

When a new business is being set up, the initial expenditure comes under the category of capital expenditure. They are eligible for deductions in the initial five years, in five instalments, as per Section 35D of the Income Tax Act 1961. But the maximum deduction cannot exceed 5% of the project's cost or capital employed in the business. 

3. Additional Depreciation

Business owners can claim an additional reduction of 20% on new machinery installed in a financial year. However, specific industries mentioned in Section 35AD of the Income Tax Act 1961 can claim this deduction, and it applies only in the first year of the new machine's operation.

4. Home Office

Many business owners use home offices to decrease the operating cost of their business. If you use your home as your office for the business, you can claim a tax deduction by claiming expenses related to depreciation, utility bills, property tax and mortgage. Tax deductions can be claimed under Section 32 for depreciation and Section 37 for other expenses. 

5. Plan your Investments Smartly

Many tax-saving investment options exist, such as ELSS, PPF, FDs, etc. You can explore these options and see which fits best for your financial goals. You can then invest in these instruments and be eligible for tax exemption while filing ITR.

Frequently Asked Questions

1. How can tax planning contribute to the growth of a small business?

Tax planning can contribute to small business growth by optimal use of financial resources, increasing profits and exploring new ways to grow business.

2. What are the critical tax considerations when planning for small business growth?

The critical considerations for small business growth are the proper business structure, writing off initial expenses, claiming depreciation, and planning your investment smartly.

3. Are there any specific tax strategies that small businesses can implement to optimise growth?

Showing business expenses, claiming deductions for home offices, and making a retirement plan can be implemented to optimise the growth of small businesses.

4. How can I structure my business to minimise tax liabilities as it grows?

A sole proprietor is a business structure where the business owner has an entire liability, and the business itself pays no taxes. Still, the taxes are levied on an individual’s income, or if you own a family business, you can register a HUF as it has many tax benefits.

5. What are the potential tax benefits or incentives available for small business growth?

Many incentives are available for businesses, such as Production Linked Incentives, Incentives for electronic manufacturing, modified electronics manufacturing clusters schemes etc.


Fi Money is not a bank; it offers banking services through licensed partners and investment services through epiFi Wealth Pvt. Ltd. and its partners. This post is for information only and is not professional financial advice.
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Tax Planning Strategies for Small Businesses


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