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25 Small Business Tax Deductions in 2024

Updated on: 23 May, 2024 04:27 PM

Business owners are liable to pay tax on their business income and report it in ITR-3. Having said that, it is common for businessmen to look for income tax deductions for small business owners. In this article, we will talk about 25 common tax deductions for small business owners to help them minimize their tax liability.

What are Some Common Tax Deductions for Small Business Owners?

While there are various deductions and exemptions available to salaried employees, small business owners can also claim several deductions and exemptions from their overall income. Given below are 25 income tax deductions for small business owners.

Rent, Rates, Taxes, Repairs and Insurance for Building

Deduction with respect to the rates, taxes, rent, repairs, insurance, and land revenue for the office premises used for business. Rent of the building is deductible only if the assessee does not own the property.


Repairs and Insurance of Machinery, Plant and Furniture

You can deduct the expenses for current repairs and insurance on plant, machinery, and furniture used for business purposes, as long as they're not capital expenses.


Depreciation

To claim depreciation, certain conditions need to be met:

  • The asset must be owned by the taxpayer.
  • It must be used for business or professional purposes.
  • The asset should have been used during the relevant tax year.
  • Depreciation is applicable to both tangible and intangible assets.

If these conditions are fulfilled, depreciation can be claimed regardless of whether the taxpayer has already deducted it when calculating their total income.


Additional Depreciation

To claim additional depreciation, these conditions must be met:

  • The taxpayer must be involved in manufacturing/production or power generation and distribution.
  • New plant and machinery must be acquired and installed after March 31, 2005.
  • The plant and machinery must meet eligibility criteria. Additional depreciation isn't applicable to certain assets like ships, aircraft, second-hand assets, assets used in office or residential settings, office appliances, and road transport vehicles. Additionally, assets that qualify for a 100% deduction in the first year under any provision of the Act are excluded.
  • The amount of additional depreciation allowance is calculated at 20% of the actual cost of the new plant and machinery. However, if the asset is used for less than 180 days in the year of acquisition, the rate of additional depreciation is reduced to 10%, with the remaining 10% allowed as a deduction in the following year.

Expenditure of Scientific Research

  • Revenue Expenditure: Costs incurred on scientific research, if related to the business, are deductible in the year they are expended. Pre-business commencement expenses on scientific research (within three years before starting the business) are also deductible in the year the business starts, subject to certification by the prescribed authority.
  • Capital Expenditure: Capital expenses on scientific research, excluding land costs, are fully deductible in the year they are incurred. Pre-business commencement capital expenses on scientific research are deductible in the year the business begins. However, depreciation is not allowable in such cases.
  • Contribution to Approved Entities: Contributions to approved research associations, universities, colleges, or other institutions are fully deductible at the actual contribution rate. This includes contributions for social science or statistical research, as well as those for approved research programs in national labs, universities, IITs, or specified persons.
  • In-House Research and Development (R&D): Expenditure on approved in-house R&D facilities is eligible for 100% deduction, provided certain conditions are met. The company must be engaged in biotechnology, manufacture, or production, excluding specified items. No deduction is allowed for land costs, but building costs can be claimed under capital expenditure rules.

Expenditure on Getting Right to Use Spectrum of Telecommunications Services

Capital expenditure paid by a taxpayer to acquire the right to use spectrum for telecommunication services through spectrum fees is deductible in equal installments over the duration of the spectrum's use. This deduction begins in the year of actual payment or the year the business commences, whichever is later, and continues until the spectrum is no longer in use. This deduction applies regardless of the financial year in which the liability for the expenditure was incurred, following the taxpayer's regular accounting method or as prescribed by regulations.


Investment Linked Tax Incentive

To qualify for the deduction, the taxpayer must meet the following conditions -

Engaged in the business of:

  • Establishing and managing a cold chain facility.
  • Establishing and managing a warehousing facility for storing agricultural produce.
  • Laying and managing a cross-country natural gas, crude, or petroleum oil pipeline network for distribution, which includes storage facilities integral to the network.
  • Constructing and operating a hotel categorized as two stars or above by the Central Government anywhere in India.
  • Establishing and operating a hospital with a minimum of 100 patient beds anywhere in India.
  • Developing and constructing a housing project under a scheme for slum redevelopment or rehabilitation, framed by the Central Government/State Government and notified by the Board in accordance with prescribed guidelines.
  • Developing and constructing a notified affordable housing project.
  • Manufacturing fertilizers in India.
  • Establishing and managing an inland container depot or a container freight station.
  • Engaged in beekeeping and the production of honey and beeswax.
  • Establishing and managing a warehousing facility for storing sugar.
  • Laying and managing a slurry pipeline for transporting iron ore.
  • Establishing and managing a semiconductor wafer fabrication manufacturing unit.
  • Developing, maintaining, and operating a new infrastructure facility.

If the aforementioned conditions are met, the taxpayer can deduct 100% of the capital expenditure in the year it's incurred. However, expenditure related to the acquisition of land, goodwill, or financial instruments is not eligible for any deduction under section 35AD.


Expenditure incurred on Agricultural extension project

If an assessee incurs expenditure on a notified agricultural extension project, they are eligible to claim a deduction of 100% of that expenditure.


Deduction for Expenditure on Skill Development

If a company incurs expenditure (excluding costs related to land or building) on a notified skill development project, it can claim a deduction of 100% of that expenditure.


Amortization of preliminary expenses

Under section 35D, certain preliminary expenses are deductible. This deduction applies to Indian companies or resident non-corporate assesses. One-fifth of the qualifying expenditure is allowable as deduction over five successive years, starting from the year the business commences, or in the year the extension of the undertaking is completed, or the new unit begins production or operation, as applicable.


Deductions under section 36

The expenses given below are deductible under section 36 -

  • Insurance premium
    Insurance premium on health on health of employees
  • Commission or bonus to employees
  • Interest on Borrowed Capital
  • Discount on Zero Coupon Bonds
    Contribution towards approved gratuity fund
  • Employer’s contribution to RPF-approved superannuation fund and notified pension scheme
  • Employees contribution towards staff welfare schemes
  • Bad debts
  • Family planning expenditure
  • STT
  • Commodities transaction tax
  • Marked to market loss

General Deduction

Section 37(1) serves as a residual provision for deductions. To qualify for deduction under this section, the following conditions must be met:

  • The expenditure should not fall under the categories outlined in sections 30 to 36.
  • It should not be classified as capital expenditure.
  • It must not be a personal expenditure of the assessee.
  • The expenditure should have been incurred in the previous tax year.
  • It should relate to the business conducted by the assessee.
  • It must have been spent solely and exclusively for the purpose of the business.
  • It should not have been incurred for any purpose that is illegal or prohibited by law.

Sale consideration on transfer of immovable property

When the stamp duty value of land or buildings exceeds 110% of the consideration received or accruing from the transfer, the stamp duty value is considered as the full value of the consideration.


Presumptive Scheme

Section 44AD applies to resident individuals, resident Hindu undivided families, and partnership firms (excluding limited liability partnerships) engaged in any business, except those involved in specified professions, earning income in the nature of agency business, or hiring or leasing goods carriages. Income is computed on an estimated basis at a rate of 8% of turnover. This rate is comprehensive, meaning no further deductions are allowed under any other section, including remuneration or interest to partners.


Medical Insurance

Under Section 80D of the Income Tax Act, 1961, premiums paid up to Rs 25,000 for medical insurance are eligible for tax deductions. This benefit extends to covering your spouse, children, and parents. However, this deduction isn't applicable if you're running a startup alongside a full-time job where your employer provides medical insurance coverage.


Donation

Donating money not only brings the satisfaction of doing a good deed but also offers tax benefits. To avail of tax benefits through donations, it's essential to donate to registered charities and funds like the PM's Relief Fund. Additionally, donations to recognized political parties also qualify for tax breaks.


Amortization of Telecom License Fees

To qualify for deduction:

  • The expense must be for capital purposes.
  • It must be for obtaining the right to operate telecommunication services.
  • The expense can be incurred before or after starting the business, during any previous year.
  • Payment must have been made to obtain the license.

Deduction amount:

  • The payment can be deducted in equal parts over the period from the year of payment until the license expires.
  • The deduction begins in the year of actual payment, regardless of when the liability for the expense was incurred, following the accounting method used by the taxpayer.

Amortization of expenditure in case of demerger or amalgamation

To qualify for a deduction, the following conditions must be met:

  • The expenditure must be capital in nature.
  • It is incurred to acquire any right to operate telecommunication services.
  • The expenditure is incurred either before the commencement of business or at any time during any previous year.
  • Payment for the above has been actually made to obtain the license.

Deduction -

The payment is allowed as a deduction in equal installments over the period starting from the year in which such payment is made and ending in the year in which the license expires. The deduction begins from the year of actual payment, regardless of the previous year in which the liability for the expenditure was incurred according to the taxpayer's regular accounting method.


Amortization of expenditure under voluntary retirement scheme

One-fifth of the amount paid shall be deducted in computing the profits and gains of the business for that previous year, with the balance deducted in equal installments for each of the four immediately succeeding previous years. This rule applies even if the scheme of voluntary retirement has not been framed in accordance with guidelines prescribed under section 10(10C).


Housing Loan

If you think buying a house with a bank loan isn't advantageous, you might be mistaken. It can serve as a valuable long-term asset that appreciates over time, coupled with tax benefits. By linking your PAN with the loan provider, you can claim tax deductions of up to Rs 1,50,000 annually under Section 80C of the Income Tax Act.


Digital Transactions

In today's digital age, it's unwise to pay workers in cash. Doing so can result in being flagged by the income tax department. Payments exceeding Rs 20,000 to an individual in cash are disallowed in your account books. For instance, if you pay a worker more than Rs 20,000 in cash on a single day, the transaction is nullified by the income tax department, potentially increasing your tax liability. Therefore, it's advisable to pay workers through bank transfers.


Inventory Valuation

Stock is typically valued at cost, but if it has a short shelf life, it must be valued based on the principle of Cost or Net Realizable Value (NRV), whichever is lower. NRV ensures that stock is not overvalued, thus potentially reducing taxes. However, consistency in this practice is crucial to avoid attracting unwanted attention from income tax authorities.


Traveling and Accommodation

Entrepreneurs often travel extensively for business purposes, especially if they have branches in multiple cities. To save taxes, it's advisable to book travel tickets and accommodation expenses through the company rather than from personal accounts. These expenses are considered business expenses and can be deducted from the taxable income of the company.


Unabsorbed Depreciation

Depreciation allowance from the previous year is initially deducted from the income chargeable under the head "Profits and gains of business or profession."

If the depreciation allowance cannot be fully deducted under this head due to the absence or inadequacy of profits, it is deductible from income chargeable under other heads of income for the same assessment year, except income under the head "Salaries."

If depreciation allowance remains unabsorbed, it can be carried forward to subsequent assessment years by the same assessee. There is no time limit fixed for the purpose of carrying forward unabsorbed depreciation.


Presumptive Taxation (Section 44AE)

Section 44AE applies if the taxpayer is involved in the business of plying, hiring, and leasing goods carriages, owning no more than 10 goods carriages at any time during the previous year. Income is calculated on an estimated basis at the prescribed rates below. No further deductions are allowed under any other section except for remuneration and interest to partners.

For heavy goods vehicles, the profits and gains are calculated at Rs. 1,000 per ton of gross vehicle weight (or unladen weight) for each month (or part of a month) during which the assessee owns the vehicle in the previous year or an amount claimed to have been actually earned from such vehicle, whichever is higher.

For goods carriages other than heavy vehicles, the profits and gains are calculated at Rs. 7,500 for each month (or part of a month) during which the goods carriage is owned by the assessee in the previous year or an amount claimed to have been actually earned from such goods carriage, whichever is higher.

If you are a small business owner who is looking to save more of your taxes, then it is important for you to know that apart from those mentioned in this article, there are several other ways to save taxes on your business income. Want to learn about more such tax-saving options?

Reach out to our tax experts and get end-to-end tax solutions, from tax planning to ITR filing. Book an online CA Now!


Frequently Asked Questions

Q- How much income is tax-free for business?

The tax slabs under old and new tax regime is given below -

Total Income Old Tax Regime New Tax Regime
Up to Rs. 50 Lakh Nil Nil
Above Rs. 50 Lakh and up to Rs. 1 Crore 10% 10%
Above Rs. 1 Crore and up to Rs. 2 Crore 15% 15%
Above Rs. 2 Crore and up to Rs. 5 Crore 25% 25%

Q- Which tax is allowed as deduction from business income?

Businesses and professionals are permitted to deduct all revenue-generating expenses. Sections 30 to 36 of the Income Tax Act 1961, provide deductions for specific costs such as rent, rates, taxes, insurance, depreciation, interest expenses, employee expenses, and more.


Q- Which donation is 100% tax-free?

Given below are the deductions available under section 80G -

  • Prime Minister’s Relief Fund
  • National Illness Assistance Fund
  • Chief Minister’s Relief Fund

Q- Is TDS deducted on donation?

You can claim tax exemptions for donations made in cash or cheque. Tax deductions can be claimed if the donation is above Rs.10,000 and the payment is made with cash or cheque.


CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.

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