Private limited companies and tax savings
In this article, you are told how tax planning can help you save tax with a private limited company. Several legal methods will be discussed in this article to save you more money on income taxes.
Should you need to understand more, you can opt for Tax Advisory or Startup Advisory Services.
Private Limited Companies – what are they?
Unlike a General Partnership, a Private Limited Company is legally formed with limited liability or legal protection for its shareholders, but that limits its ownership. Quite simply, a private limited company is a legal entity formed by statute. By law, it possesses many rights, obligations, powers, and duties.
Paying taxes in a Private Limited Company is one of the main obligations. There is no way to or should be avoided paying taxes, but certain tax planning steps can be taken in order to gain some monetary benefits.
If you have a limited company, is there a way you can save money on taxes?
Directors’ salaries
- It is a director’s responsibility to oversee and oversee a company’s performance.
- Directors can save more tax by getting salaries.
- As an alternative to paying dividends, you can pay your employees’ salaries.
- Unless otherwise specified, this is the only expense that a Private Limited Company can deduct as a business expense.
- In other words, if a company earns a profit of Rs. 4 lakh, it can pay salary to the directors, say 2 lakh to each director.
Director sitting fees would also be paid.
- A company may pay a director a sitting fee for attending its board meetings or its committee meetings.
- The Board of Directors of the company will determine the payment for each board meeting or committee meeting, which will not exceed 1 lakh.
- This will qualify as “Expenditure” for the company, and will be exempt for the individual within prescribed limits.
- Compensation, fees, or commissions, irrespective of their name, will be deducted at the rate of 10%.
- It means that if a person attended a company’s board meeting and the board determined that the meeting fee would be Rs. 80,000/-, then the company would pay that person Rs. 72,000/- and deduct Rs. 8000/- for taxes.
Expenses amortized over six months.
- On the balance sheet of a company, the moment an asset is purchased, it is classified as a capital asset.
- Rather than appear in the Profit & Loss account, an asset appears on the Balance Sheet.
- The full depreciation will be counted on the assets purchased if they are expected to generate revenue for the business for at least 180 days.
- In turn, the tax benefits will accumulate over time.
Initial expenses
- An organization’s preliminary expenses are its expenses incurred for incorporation.
- Before and after the formation of your Private Limited Company, you will incur several expenses.
- The founder of a Private Limited Company is responsible for the costs associated with its incorporation.
- A few examples are fees paid to the Registry of Companies, stamp duty, printing costs of documents, and professional charges paid for drafting MOAs and AOAs.
- Accounting for such expenditures can be beneficial to individuals.
Rental expenses
- The registered address of the company can easily be shown as an expense of rent if the address is listed in the name of the director or in the name of a family member of the director.
- All you have to do is make a lease agreement in the owner’s name, start transferring rent, and book the rental expense in the company’s books.
Earn money from a member of your household
- You should incorporate family members’ salaries into the company’s books when they are part of the business.
- Therefore, you will be able to earn profits and take them home.
Entertainment costs
- – this is the most fun expense in business.
- A business celebration is necessary periodically.
- Accounting for this expense in the books of account will save 30% in tax.
Meeting costs
- Expenses associated with meeting clients over dinner, attending a theater performance or watching a sporting event are deductible.
- In addition, you can use it for socializing and for business purposes when you travel a lot and attend a lot of meetings.
- All such expenses can be accounted for properly to reduce your tax burden.
Transportation expenses incurred by directors.
- A director’s vehicle is normally used for traveling and meetings in the business.
- Fuel expenditures as well as repair maintenance expenses for such a vehicle are also imputable to the company, since the same expenses are exclusive to the business.
Savings on taxes for companies can range from 22 to 30 percent. Documentation is essential. You can take full advantage of planning properly if you do it.
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