Sole proprietorship business is taxable as is an individual under the Income Tax Act. If a person is sole proprietor of more than one business, he is liable to pay tax on income from all firms together as a single assessee.
To compute the total income of an individual, let’s understand the procedure. Total income is equal to the net profit of all businesses and sole proprietorship firms of the individual. Net profit of the firm, in turn, means gross receipts/turnover less all expenditure made related to the business.
To make it more clear, total income of an individual is calculated by adding net profits of all proprietorship firms of the individual. For income tax purposes, a sole proprietorship firm can maintain its accounts either on cash basis or on accrual basis. Method of accounting is also very useful for tax calculation.
To minimize the tax liability, you should first recognize the expenditure related to the business. Normally, sole proprietorship business runs from home or without having proper office, especially in case of services, and many assets are used simultaneously for business and personal purposes. To claim expenditure, you should segregate expenditure for business and personal purposes. Apart from direct expenses, below are common expenditures made for business purpose:
Rent of the business place. You can pay rent to the owner of the property even if the business is run from home. A proprietor cannot take rent for the property he owns.
Running, maintenance, finance cost and depreciation of vehicle.
Computer, furniture and equipment maintenance, interest cost and depreciation.
Telephone, internet and communication expenses.
Electricity, power and generator running and maintenance expenses.
Staff salary and welfare expenses.
Stationery, computer consumables, books and periodical expenses.
Advertising, promotion and website expenses.
Travelling and conveyance expenses.
For claiming the expenditure against a business income, following requirements need to be met:
You must have an evidence to support the expenditure made.
Make no cash expenditure beyond specified limit.
Deduct and deposit TDS if applicable.
Certain deductions are applicable to all individual assesses. The same is true for sole proprietor also. Following deductions can be claimed to save tax:
Deduction u/s 80C of the Income Tax Act for investments in LIC, PPF, mutual funds, tuition fee, principal payment of housing loan, etc up to Rs.1,00,000.
Deduction u/s 80CCF up to Rs.20,000 for investment in infrastructure bonds.
Deduction u/s 80D against payment of Mediclaim policy premium up to Rs.15,000.
Deduction u/s 8GG if a person is paying rent for his residence.
Deduction u/s 80G for donation to any registered charitable organization.
Special provision for small business providers
A new provision has been made in the Income Tax Act with effect from 2010-11 that if an assessee has a turnover of less than Rs.60 lakh a year, he can declare income at eight percent or more on the total turnover and shall not be liable to maintain any books of accounts. So, even if you have a maximum turnover of Rs.60 lakh, your income will be assumed as Rs.4.80 lakh only and total tax liability will be Rs.30,900 (for male individuals below 60 years). This provision is applicable to all businesses having turnover of up to Rs.60 Lakh, irrespective of the nature of business.
Adjustment of losses
Under the Income Tax Act, if an assessee incurs loss in one business, he can set off this with profit from another business. If the loss still persists, the assessee can carry forward this to next year and set off with the profit next year, and so on up to eight years from the year of loss. To carry forward business loss to next year, assessee must file the return on or before due date.
If sole proprietorship business has a turnover from export, one can avail up to 100 percent tax exemption by setting up a unit in a special economic zone. No tax is levied on income for the first five years. As much as 50 percent income is taxable in the next five years under section 10AA of the Income Tax Act.
Mukesh Goel is a chartered accountant and partner at Mukesh Raj & Company.
©Entrepreneur October 2011