As a founder of a start-up or your very own business, you already have your hands full- establishing and running the business. Additionally, wanting to stay informed about the developments in accounting and taxation can be taxing and asking for too much! Thus, it is best for start-ups to outsource their accounting and tax preparation for accounting professionals and experts.
Following is a synopsis of 10 things start-ups need to know about accounting and tax preparation in 2019:
1. Don’t mix business and personal accounts
It is absolutely a must to have separate accounts for business purposes and personal purposes, including bank accounts. This can ease the burden of your accountant and reduce your efforts of answering his/her queries as regards the nature of expense or the source of an income item.
2.Proper record keeping
It is vital to account for each and every expense and income, irrespective of the value. This is not only useful to analyse the unwanted expenditure and take corrective action, but also for audit purposes. This is especially important in the case of cash expenditures. In wage payment to unorganized labour, often lack of adequate documents can result in higher tax payment. The thumb impression or a wage register should be maintained to document petty cash expenses. Also, with exceptions under Rule 6DD of the IT Rules, cash payments of over Rs 20,000 in a day are disallowed as a deduction.
Often startups are not aware of the depreciation methods, the rates and the amount to be charged off as business expenditure. This can result in the payment of higher business tax. It is prudent to avail the help of an expert to ensure correct classification of the asset under plant and machinery, equipment, fixtures etc and charge the eligible rate of depreciation.
There are multiple methods of valuing stock i.e. cost or net realisable value. The most suitable method based on the condition and shelf life of the stock would be recommended by the accountant. It is important to maintain consistency in the methods so as to avoid IT notice.
According to the business presence, whether local or multinational, the adoption of accounting and tax preparation principles would vary. There are several accounting standards in places like Indian Accounting Standards, US GAAP and IFRS. The recognition of an item, whether revenue or capital also varies.
6.TDS is mandatory
As per the provisions of the Income Tax Act, it is mandatory for a service receiver or buyer to deduct tax at source at the time of payment to service provider or seller in case the amount exceeds a certain threshold. Failure to do so would result in the expenditure being disallowed as a deduction. This would increase taxable profits and tax liability.
7.Meet the IT deadline
It is prudent to file the IT returns before the deadline in order to avail tax benefits. Business income losses can be carried forward for a consecutive period of 8 years to be set off against the business incomes of current and future 8 years. This is permissible only if returns are filed before the due date.
8.Consult an expert
Rather than trying to understand the tax laws oneself, it is best to approach a qualified chartered accountant. Often due to lack of proper tax planning, one has to bear higher tax liability. Rather than avoid the last-minute rush, it is a good idea to provide the relevant documents to the accounting and Tax preparation firm in advance, so that the books of accounts are readily available on time. Tax professionals are well versed in the recent developments and legal amendments. For example, the IT Dept has announced relief on the 30% angel tax payable on the investment made by external investors. 120 firms have obtained approval to obtain tax relief for up to 10 years, subject to satisfying the conditions. Start-ups registered with the department for the promotion of industry and internal trade would not have to pay tax on the share premium received in excess of fair market value.
9. Avoid interest and penalty
Failure to pay tax on time and violation of legal provisions can result in the levy of penal interest and other charges. Further, it is mandatory to pay advance tax and deposit the same with the tax authorities before the due date.
10. Go digital
With Digital India, becoming the new norm, it is best to embrace electronic accounting records and eliminate manual records. This way, you can generate e-invoices and other documentation without the hassles of extensive paperwork and ensure compliance with regulatory authorities. Further, the accounting entries would be automatically integrated to generated financial statements, reflecting the business performance.
The above points summarize the basic accounting and tax preparation that start-ups need to be aware of in 2019. With proper, timely guidance from accounting experts, your start-ups can smoothly manage their accounting and tax matters with your complete peace of mind.