Top Income Tax Deductions for Businesses
Taxpayers file Income Tax Returns as individuals or separate entities for having income from various sources. For example, individuals and HUF receiving income under the head “profits and gains from business and profession” file ITR 3, while companies paying taxes under Section 44ADA of the Income Tax Act 1961, file the returns in ITR 4. While filing the returns, they can claim income tax deductions for business expenses to reduce the overall tax liability. Do not know what deductions are available for the businesses, continue here as this post covers all the potential deductions you can claim.
Business Deductions
Though there are hundreds of possible income tax deductions for businesses, here we are going to discuss the most significant ones that can tremendously impact your taxable income.
Rent, Rates, Taxes, Repairs, and Insurance for Building
You get deductions on rent, rates, taxes, repairs, insurance, and land revenue for office premises used for business. Rent deductions allowable only when the assessee does not own the rented property.
Repairs and Insurance of Machinery, Plant, and Furniture
Expenses incurred for repairs and insurance on plant, machinery, and furniture are allowable as deductions as long as they are not used as capital expenses.
Depreciation Section 32(1)(i) & (ii)
Depreciation on buildings, machinery, plant, or furniture, being tangible assets, and know-how, patents, copyrights, trademarks, licenses, franchises, or any other business or commercial rights of a similar nature, being intangible assets allowed on the “straight line method” and “WDV method for each block of asset”
Expenditure on Research and Development
- Revenue Expenditure: It is deductible in the year in which it is incurred on scientific research, including pre-business commencement (within 3 years before starting the business) expenses, subject to certification
- Capital Expenditure: deductions allowed on capital expenditure, excluding expenses incurred on land
- Contribution to Approved Entities: expenses to make contributions for research programs in national labs, universities, IITs, colleges, or other institutions are fully deductible
- In-House Research and Development (R&D): Expenditure on approved in-house R&D facilities is eligible for 100% deductions
Investment Linked Tax Incentive
If your business deals in one of the following sectors, then it is eligible for investment-linked tax incentives
- Cold chain facility
- Warehousing facility for storing agricultural produce
- Pipeline network for natural gas, crude, or petroleum oil distribution
- Hotel above two-star construction or operation
- A hospital with a minimum of 100 patient beds
- A housing project under a scheme for slum redevelopment or rehabilitation (government-approved)
- Notified affordable housing project
- Fertilizer manufacturing
- Inland container depot or a container freight station establishment and management
- Beekeeping and honey, and beeswax production
- Warehousing facility for sugar storage
- Slurry pipeline for iron ore transportation
- A semiconductor wafer fabrication manufacturing unit
- A new infrastructure facility
Expenditure on Skill Development
Businesses spending on skill development can claim 100% deductions, excluding costs related to land or buildings.
Spending on the Agricultural Extension Project
On the spending incurred on the agricultural extension project, businesses can claim 100% deductions.
Deductions u/s 36
Expenses incurred under the following scenarios are eligible for deductions under Section 36 of the Income Tax Act
- Insurance premium
- Commission or bonus to employees
- Interest on borrowed capital
- Discount on zero-coupon bonds (contribution towards approved gratuity fund)
- Employees’ contribution towards the staff welfare scheme
- Employer’s contribution to RPF-approved superannuation fund and notified pension scheme
- Bad debts
- Family planning expenditure
- STT
- Commodities transaction tax
- Marked to market loss
General Deductions
General deductions or Section 37(1) deductions serving as a residual provision for individuals, the following conditions must be met to claim these deductions
- Expenditure not falling into categories outlined in sections 30 to 36
- Not classified as capital expenditure
- Not personal expenditure of the assessee
- Expenditure incurred in the previous tax year
- Spent solely and exclusively for the purpose of the business
- Not incurred for any purpose cited as illegal or prohibited by law
Presumptive Scheme (Section 44AD)
The businesses that opt for presumptive taxation pay taxes based on their annual turnover and a certain percentage of their income. Under this scheme, tax is calculated on a presumptive basis as the comprehensive rate of 8% of the turnover. As the rate is comprehensive, no further deductions are allowed to the eligible candidates and entities.
Deduction on Medical Insurance Premiums
As per section 80D, premiums up to Rs 25,000 for medical insurance are eligible for tax deductions. The benefit is nullified in case you are running a start-up alongside a full-time job where you are provided medical insurance coverage.
Deduction for Housing Loan
You can claim deductions up to Rs 1,50,000 annually for a home loan under Section 80C of the Income Tax Act. You can claim this just by linking your PAN with the loan provider and can claim huge benefits to reduce the overall tax liability.
Presumptive Taxation (Section 44AE)
So much similar to the presumptive taxation as per section 44AD, under section 44AE, the income is calculated on an estimated basis, and the businesses pay taxes on a pre-specified tax rate. Certain eligible businesses involved in plying, hiring, and leasing goods carriages can claim the exclusive deductions under this section. No other deductions are applicable to them if they opt for the presumptive tax as per section 44AE.
Get Started with TaxDunia
If you are running a big company or a small business, taxation might give you a headache. It potentially disrupts the cash flow and impacts the operations negatively until met with utmost care and precision. To release the worries and ensure unhindered growth, reaching out to a finance and business advisor seems the best option. Do not make further delays and book your call the one of the best online consultants near your area.
