Written by : AK Agrawal

An experiences Chartered Accountant and Techno-Functional consultant working in industry for over 10 years dealing with multinational corporate clients. He is loves reading latest trend of technology trend.

Tax Saving Tips for Private Limited Company

AK Agrawal
AK Agrawal, Chartered Accountant

Aug 30, 2021 10:53

Taxes are on everyone's mind almost always. They impact our everyday lives, which is distressing but true. Undoubtedly, we cannot escape paying taxes as it is part of our legal obligation and moral responsibility. However, implementing some tax preparation steps during each financial year can provide you with additional monetary benefits for your private limited company.

Let's look at how a private limited company functions. A private limited company is legally created with limited liability or legal protection for its stockholders, but it has ownership limits. Paying taxes stands among the primary duties of a private limited company, among many others. In a private limited company, aside from receiving positive feedback from consumers and having a successful business, there is just one motivator — a high profit. And it is unquestionably the driving force behind the growth of your success ladder. The expected market growth of any firm is for sales to come first, followed by profit. And then, after all the efforts, when we accomplish a good profit, the company aims to reward its stakeholders. But, they cannot prevent the levy of income tax which can go as high as 30 percent.

Before these taxes get the best of us, let's look at some Tax-Saving Tips for Private Limited Companies.

Asset depreciation:

When a company buys an asset, it classifies it as capital assets on its balance sheet. Similarly, the purchased item will display on the asset side of the Balance Sheet rather than the profit and loss statement. If the assets purchased are projected to create income for the business for a longer duration, such as 180 days or more, entire depreciation on assets will be counted. It will eventually result in tax benefits over time.

Preliminary expenses:

Preliminary expenditures are the costs associated with incorporating a firm. Several expenditures are incurred both before and after the formation of a private limited business. These are professional fees spent for the preparation of the MOA and AOA. Document printing costs, ROC fees, stamp duty, and so forth. These costs are incurred by the founder of a private limited company for it to be established. It stands as the most effective ways to extract tax benefits from these expenses by documenting them in books of accounts.

Rental costs:

While registering your private limited company, you need a registered address at a specific location. It's not a big problem if the place is genuinely for rent, but it's a different situation if it's in the director's name or his family member. In this case, you may readily record the rental expense. All you should do is enter into a lease agreement in the owner's name, begin depositing rent, and record rent expenses in the company's books. You can also book additional tax savings by legally showcasing rent expenses.

Using director's salary:

Salary of directors is the most straightforward approach to save tax in a private limited company. A director is someone who oversees the firm's performance and leads a certain division of the organization. Instead of distributing profits as dividends, you might distribute profits as salary as the company's founder. You will undoubtedly collect profit from the company in a predetermined ratio. Instead of collecting this as dividends, use that portion as pay, which is an allowed cost for a private limited.
For instance, suppose a private limited company has a profit of Rs. 8 lakhs, this is to be divided equally among the founder/directors. Instead of displaying Rs. 4 lakhs as profit-sharing, each director can be paid Rs. 4 lakhs as a part of their salary.

Claiming Director's sitting fees:

The new rules of section 197 of companies act 2013 state that, "A company may pay a sitting fee to a director for attending meetings of the board or a committee thereof." Such sums as the Board of Directors of the company may set shall not exceed Rs. 1 lakh for each board meeting or a committee thereof. That can be claimed as an "Expenditure" in the private company's hands. However, it is exempt in the hands of the relevant directors up to a certain limit. Duly claiming the director's sitting fees can also optimize the tax liability of the private company.

Moreover, on any salary, fees, or commission, by whatever name termed, there is a need to deduct TDS at the rate of 10%.

For instance, if an individual attends a board meeting for a firm and the board decides on a per meeting charge of Rs. 90,000/-, the company must pay the individual Rs. 81,000/- and Rs. 9000/- would get charged as TDS.

Vehicle expenditures for the director:

Following the sitting, fees are the director's vehicle expenses. Typically, a company does not possess its car, and one of the directors' vehicles gets utilized for business travel and meeting purposes. And it involves not just fuel but also car maintenance and repairs. Because the expense is solely for business purposes, you must record the vehicle spendings in the company's books.

The above expenses are simple ways for businesses to save an increased levy of taxes on their income. Yet, simply booking the costs will not work that way, as mentioned above. The expenses need appropriate paperwork and preparation to reap the full and actual advantage, but it is well worth the effort.

Family member's salary expenditure:

When family members are active in the business, begin recording their salaries as an expense in the company's accounts. This is how you are bringing the profit back home along with dual tax benefits.

Expenses for Entertainment :

As the classic phrase goes, "All work and no play make Jack a dull boy," which is true here. As a result, the entertainment expenditure falls to your aid. Every quarter, you must celebrate your achievements and motivate the team by holding collaborative events with the directors, employees, or shareholders. So, once again, don't just let such costs go unaccounted for by recording your expenditures. Get reductions on your corporate events’ costs. Maintain these payments in books and save on your overall tax liability.

Meeting costs:

Building relationships with clients is an essential aspect of every business, and it entails a lot of meetings over dinners, lunches, and so on. These costs include bringing a customer out to dinner, to a play, or a sporting event. These expenses are typically tax-deductible. In addition, for business purposes, you mingle a lot, attend a lot of meetings, and travel to many locations. Please do not neglect to register them to reap the benefits properly.

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AK Agrawal
AK Agrawal, Chartered Accountant

Aug 30, 2021 10:53

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