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For small business owners and professionals, at leastis to select the right form of organization for your enterprise," according to Albert B. Ellentuck in the Laventhol and Horwath Small Business TaxPlanning Guide. "You'll end up paying radically different amounts of income tax depending on the form you select. And your odds of being audited by the IRS will change, too." Many aspects of tax planning are specific to certain business forms; some of these are discussed below:
person can make up for the deficiency and avoid a penalty. The IRS has also been known to waive underpayment penalties for people in special circumstances. For example, they might waive the penalty for newly self-employed taxpayers who underpay their income taxes because they are making estimated tax payments for the first time. Another possible tax planning strategy applies to partnerships that anticipate a loss. At the end of each tax year, partnerships file the informational Form 1065 (Partnership Statement of Income) with the IRS, and then report the amount of income that accrued to each partner on Schedule K1. This income can be divided in any number of ways, depending on the nature of the partnership agreement. In this way, it is possible to pass all of a partnership's early losses to one partner in order to maximize his or her tax advantages.
C CORPORATIONS.
Tax planning for C corporations is very different than that for sole proprietorships and partnerships. This is because profits earned by C corporations accrue to the corporation rather than to the individual owners, or shareholders. A corporation is a separate, taxable entity under the law, and different corporate tax rates apply based on the amount of net income received. As of 1997, the corporate tax rates were 15 percent on income up to $50,000, 25 percent on income between $50,000 and $75,000, 34 percent on income between $75,000 and $100,000, 39 percent on income between $100,000 and $335,000, and 34 percent on income between $335,000 and $10 million. Personal service corporations, like medical and law practices, pay a flat rate of 35 percent. In addition to the basic corporate tax, corporations may be subject to several special taxes. Corporations must prepare an annual corporate tax return on either a calendar-year basis (the tax year ends December 31, and taxes must be filed by March 15) or a fiscal-year basis (the tax year ends whenever the officers determine). Most Subchapter S corporations, as well as C corporations that derive most of their income from the personal services of shareholders, are required to use the calendar-year basis for tax purposes. Most other corporations can choose whichever basis provides them with the most tax benefits. Using a fiscal-year basis to stagger the corporate tax year and the personal one can provide several advantages. For example, many
corporations choose to end their fiscal year on January 31 and give their shareholder/employees bonuses at that time. The bonuses are still tax deductible for the corporation, while the individual shareholders enjoy use of that money without owing taxes on it until April 15 of the following year. Both the owners and employees of C corporations receive salaries for their work, and the corporation must withhold taxes on the wages paid. All such salaries are tax deductible for the corporations, as are fringe benefits supplied to employees. Many smaller corporations can arrange to pay out all corporate income in salaries and benefits, leaving no income subject to the corporate income tax. Of course, the individual shareholder/employees are required to pay personal income taxes. Still, corporations can use tax planning strategies to defer or accrue income between the corporation and individuals in order to pay taxes in the lowest possible tax bracket. The one major disadvantage to corporate taxation is that corporate income is subject to corporate taxes, and then income distributions to shareholders in the form of dividends are also taxable for the shareholders. This situation is known as "double taxation."
S CORPORATIONS.
Subchapter S corporations avoid the problem of double taxation by passing their earnings (or losses) through directly to shareholders, without having to pay dividends. Experts note that it is often preferable for tax planning purposes to begin a new business as an S corporation rather than a C corporation. Many businesses show a loss for a year or more when they first begin operations. At the same time, individual owners often cash out investments and sell assets in order to accumulate the funds needed to start the business. The owners would have to pay tax on this income unless the corporate losses were passed through to offset it. Another tax planning strategy available to shareholder/employees of S corporations involves keeping FICA taxes low by setting modest salaries for themselves, below the Social Security base. S corporation shareholder/employees are only required to pay FICA taxes on the income that they receive as salaries, not on income that they receive as dividends or on earnings that are retained in the corporation. It is important to note, however, that unreasonably low salaries may be challenged by the IRS.
For the purpose of taxation companies in India are broadly classified into domestic companies and foreign companies or in other words resident or non-resident. Depending on their residence they are subjected to different tax treatment. Companies that are registered in India according to the Companies Act of 1956, are deemed to be domestic companies and a company whose chief control and management are wholly located within India is also known as domestic company. A domestic company may be a public company or a private company. A company which is not registered in India and if its management control is exercised from a foreign country then it is treated as a foreign company.
Key Provisions
A domestic/ resident company is taxed on 1. Any income which is received or is deemed to be received in India in the relevant Previous Year by or on behalf of such company 2. Any income which accrues or arises or is deemed to accrue or arise in India during the relevant Previous Year 3. Any income which accrues or arises outside India during the relevant Previous Year.
A Foreign/non-resident company is taxed on 1. Any income which is received or is deemed to be received in India during the relevant Previous Year by or on behalf of such company 2. Any income which accrues or arises or is deemed to accrue or arise to it in India during the relevant previous year.
A domestic/ resident company would be subjected to an additional tax called dividend tax on the amount of dividend declared, distributed or paid. Dividends tax is charged on the company and not charged on the hands of the shareholders. Such tax must be paid within 14 days of declaration or distribution, whichever is earlier. Any deduction on account of such tax is not allowed to the company.
Companies with more than INR 10 million total incomes are subjected to a surcharge on their taxes. Domestic companies pay a surcharge of 5% as against foreign companies that pay a surcharge of only 2%.
Withholding tax is applicable on payments made to foreign companies operating in India without permanent establishment.
32.445% (30% basic rate plus surcharge 30.9% (30% direct tax plus of 5% plus education cess of 3%) education cess of 3%)
42.024% (40% plus surcharge of 2.5% and 41.2% (40% plus and education education cess of 3%) cess of 3%)
In addition to the basic corporate tax rate the following important taxes are applicable 1. Minimum Alternate Tax rate of 18.5% (plus applicable surcharge and cess) 2. Dividend Distribution Tax of 16.22% is charged on domestic companies 3. Foreign dividends received by an Indian company currently are taxed at a rate of 30% (plus the surcharge and cess). To encourage Indian companies to repatriate funds, it is
proposed that where the total income of an Indian company includes any dividend declared, distributed or paid by a foreign subsidiary company, the dividends will be taxed at 15% on a gross basis. No deduction in respect of any expenditure or allowance will be allowed in computing the dividend income. 4. Wealth tax is charged @ 1% of the amount by which the net wealth exceeds Rs.3 Million 5. Fringe benefits are taxable at 30% tax rate and additional 3% education cess on the total tax amount. For corporate with turnover of over INR 10 million, there is additional 10% surcharge on the 30% tax. 6. Short term capital gains are taxed at normal basic income tax rate and Long term capital gains are charged 10% -20%. Short term gains on sale transactions of equity shares / unit of an equity oriented fund attract 15% tax rate while long term tax gained on similar transaction is exempted from tax. 7. Withholding Current rates for withholding tax for payment to non-residents are as follows Interest Dividends (Domestic Companies) Royalties Technical services Any other services 20% * Nil 20% 10% 40% of the income Tax
8. Note: Applicable to Non-resident belonging to countries that are not party to DTAA with India. Rates will be competitive for DTAA partner countries. 9. *In order to augment long-term, low cost funds from abroad for the infrastructure sector interest received by a non-resident from an infrastructure debt fund set up in accordance with guidelines to be prescribed and notified by the central government will be taxed at a rate of 5% (plus the applicable surcharge and education cess) on the gross amount 10. In addition several other taxes will be charged as indirect charges CENVAT, VAT, Service Tax, Customs duty etc
Computation of Tax:
Particulars All Incomes Amount :xxxx
Less: Losses, expenses & Allowable :xxxx Exemptions Gross Total Income Less: Allowable Deductions Tax: Total Income X Tax Rate Less: Reliefs & Rebates = Tax Payable : xxxx :xxxx : xxxx : xxxx : xxxx
Income from house/property Capital gains Profits and gains of business or profession Income from other sources such as foreign dividends, interests etc. Income from other sources including interest on securities, winnings from lotteries, and also, income of other persons may be included in the income of the company.
The income is adjusted for current and brought forward losses and qualifying exemptions to arrive at the Gross Total Income. which should be adjusted allowable deductions to arrive at the net income
Allowable Deductions
In computing taxable total income, Gross Total Income should be adjusted for allowable deductions to arrive at the net income, several deductions are allowed which include the following.
Capital Allowances expenses on R&D, mergers & acquisitions qualify for deduction Depreciation available at specific percentage depending on the nature of the asset and depreciation not set off against current years income can be carried forward for set off against any future income for an unlimited period.
Stock/Inventory valuation at market value or cost whichever is lower Interest Interest paid on the borrowings Losses can be set off against any other income in the same Assessment Year and against business profits in subsequent assessment years subject to certain conditions.
The net income thus arrived is the chargeable income which is subjected to tax to determine the tax accrued from which the tax rebates and credits are deducted to arrive at the actual tax payable.
Domestic companies are allowed to deduct dividend received from other Domestic Companies in certain cases
Special Provisions apply to Venture Fund and Venture Capital companies Subject to certain conditions Deductions are allowed to Exports and new undertakings Special Deductions for developing, maintaining, and operating new infrastructure and power facilities
Business Losses can be carried over for eight years Interest, Dividends and Long-Term Capital Gain income earned by an Infrastructure Fund from investments in shares or long-term finance in enterprises carrying on the business of developing, monitoring and operating specified infrastructure facilities or in units of Mutual Funds involved with the infrastructure of power sector are to be tax exempt.
Payment of Tax
After calculating the income tax, tax can be paid through Online deposit or through Nationalized banks.
Except form ITR-7, which is in respect of charitable/religious trusts, political parties and other non-profit organizations, all the forms can be electronically filed. The consequences of late submission range from penal interest, penalty, deprival of privilege for certain deduction, and in case of losses reported few losses cannot be carried forward.
In the return the details of high value transactions need to be compulsorily stated, which are ordinarily reported through the annual information return (AIR) and these details are cross checked and matched with the data in the AIR. The form must be verified and endorsed by the following persons, as applicable.
Resident company: Managing Director or, where there is no Managing Director or he is not able to sign and verify the return due to any unavoidable reason, by any director thereof.
Non-Resident company: The return may be signed and verified by a person holding a valid Power of Attorney from the Company, which should be attached to the return
furnishing the return electronically under digital signature; transmitting the data in the return electronically and thereafter submitting the verification of the return in Form ITR-V.
The collection of acknowledgement completes the filing process. An assessee will have to produce documents, if required by the Assessing Officer to complete the assessment.
Assign Computed
Started an HUF by passing 50% of business Profit = 1000000 Income tax slab (in Rs.) 0 to 1,80,000 1,80,001 to 5,00,000 5,00,000 to 8,00,000 Above 8,00,000 Total Add: 3% cess Total Tax Tax No tax 10% 20% 30% 32000 60000 60000 152000 4560 156560
If HUF started and profit will divided equally Assign Profit Rs. 500000 So, Tax Income tax slab (in Rs.) 0 to 1,80,000 1,80,000 to 5,00,000 Add 3% cess Total Tax Tax No tax 10% 0 32000 960 32960
HUF Income tax slab (in Rs.) 0 to 1,80,000 1,80,000 to 5,00,000 Add 3% cess Total Tax Tax No tax 10% 0 32000 960 32960
Total Tax = 32960+32960 = 65920 Tax as = 65920/1000000*100 = 6.592% Tax Saving = 15.65-6.592 = 9.028%
Rajesh Electronics Take advantage of 80c and 80d Income = 400000 Income tax slab (in Rs.) 0 to 1,80,000 1,80,000 to 4,00,000 Add 3% cess Total Tax Tax No tax 10% 0 22000 660 22660
Tax as % = 22660/400000 = 5.665% Now, with advantage 400000 - 80 (C)100000 -80 (D)20000 280000 Income tax slab (in Rs.) 0 to 1,80,000 1,80,000 to 2,80,000 Add 3% cess Total Tax Tax No tax 10% 0 10000 300 10300
KavanPharma Open Export oriented unit Profit Rs. 1500000 Before opening unit :Income tax slab (in Rs.) 0 to 1,80,000 1,80,000 to 5,00,000 5,00,000 to 8,00,000 8,00,000 to 1500000 Total Add 3% cess Total Tax Tax No tax 10% 20% 30% 32000 60000 210000 302000 9060 311060
So Tax as 311060/1500000*100 = 20.73% If started EOU and 60% shifted then 1500000*40% = 600000 Income tax slab (in Rs.) 0 to 1,80,000 1,80,000 to 5,00,000 500000 to 600000 Total Tax Add 3% cess Total tax Tax No tax 10% 20% 0 32000 20000 52000 1560 53560
1500000*60% = 900000 So, here no tax applicable So, 53560/1500000*100 = 3.57% Tax saving = 20.73 3.57 = 17.15%
Ratnam Plastic Contribution Money to national Lab Profit Rs. 650000 Tax if no money is contributed Income tax slab (in Rs.) 0 to 1,80,000 1,80,000 to 5,00,000 500000 to 650000 Total Tax Add 3% cess Total tax Tax No tax 10% 20% 0 32000 30000 62000 1860 63860
So tax as % = 63860/650000*100 = 9.82% Tax if Money contributed Amt contributed Rs.40000 So 650000-50000 (125% of 40000) = 600000. Income tax slab (in Rs.) 0 to 1,80,000 1,80,000 to 5,00,000 500000 to 600000 Total Tax Add 3% cess Total tax Tax No tax 10% 20% 0 32000 20000 52000 1560 53560