What is a Small Company: Definition, Characteristics & Tax Deductions

A proposal submitted by the Finance Minister during the Union Budget of 2021 included the revision of the definition of what constituted a small company or business.  The aim behind the revision was to further provide ease of doing business and reduce the compliance burden for many small businesses in India.

Following the proposal, the Ministry of Corporate Affairs (MCA) amended the definition of a small company by notifying the Companies Amendment Rules, 2021 (Specification of Definitions Details), under Section 2(85) of the Companies Act, 2013.  The new definition has been effective from April 1, 2021.

The New Amended Definition of Small Companies
Characteristics of a Small Company
Tax Deductions for Small Companies

The New Amended Definition of Small Companies

The new amended definition states that – A small company that is not a public company and has –

1. A paid-up share capital equal to or below INR 2 crore or such a higher amount specified not exceeding more than INR 10 crore.
2. A turnover equal to or below INR 20 crore or such a higher amount specified not exceeding more than INR 100 crore.

The following companies, however, do not fall under the purview of small companies –

1. A holding or a subsidiary company.
2. A company registered under section 8.
3. A body corporate or company governed by any special act.

Characteristics of a Small Company

Small companies can be identified by these characteristics –

Low Profitability and Revenue

Compared to medium and large companies, a small company has less revenue that depends on the business itself and the capability to generate revenue. Lower revenue, however, cannot be considered lower profitability.

Fewer Employees

Small companies may be handled by a single person or a very small team.  This is due to lesser paid-up capital and turnover.

Smaller Market Area

Small companies have a smaller market area like a section within a community or society  An example of such companies is convenience shops in a rural township.

Fewer Locations

Small companies are limited to a particular area instead of several branches.  The sales of such a company are also confined to a single area.

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Tax Deductions for Small Companies

A business, no matter its size, is subjected to taxes by the government.  Hence, it is important for business owners to understand how to identify tax deductions that are relevant to their field of work.  This article lists some of the most significant tax write-offs for small businesses and helps business owners lower their income taxes.

Business Meals

A 50% tax deduction can be claimed on the cost of food and drinks if it is related to the business.  This can be done through a few documents that include the date and place of the meal and the cost of the meal. The details must also mention the meal partner related to the business.

Business Insurance

The costs of business insurance can be written off from tax returns significantly reducing small business tax. In case the office of the business is at home, the insurance cost can be deducted by the renter from the tax returns.

Work-Related Travel Expense

All payments made outside of tax home on a business trip can be included in tax deductions for small businesses. These expenses include airfare, laundry bills, and everything in between.

Salaries and Benefits

On the assurance that the employee receiving a salary and the benefits is not a partner or the sole proprietor, the wages and benefits being given to said employee or employees and their vacation costs can be deducted from tax returns.  

Real Estate and Mortgage Deduction

Property taxes, up to a certain amount, including the taxes paid to state and local authorities for real estate can be claimed in tax deductions. These include interest payments for mortgage loans if used for repair or purchasing a house for business operations.

Child and Dependent Adult Care Costs

Expenses incurred in the care of children younger than 12 years can be written off as deductibles. Similarly, costs incurred to care for physically or mentally dependent adults are also eligible for tax deductions.

Expenses Towards Business Operations

Costs incurred for advertisements and promotion of business through print and digital media are deductible from taxable income. Funding for corporate and cultural events for clients and employees can be claimed as tax deductions if a relationship can be established between these expenses and the business itself.

Medical Expenses

Costs related to medical care and health insurance premiums can be claimed as tax deductions as well. These expenses are sizeable and include doctor fees, costs of prescription drugs, and other charges related to medical services.

Vehicle Usage

If the vehicle is utilized for fulfilling business processes, any costs incurred towards the maintenance and operation of the vehicle can be deducted from taxable income.

Office Supplies

Money spent for buying office supplies like pens, printers, paper, and any other stationery items can be deducted from tax returns. However, this amount can only be claimed in the same year as they were purchased. Shipping and postage costs related to the business can also be claimed as tax deductions.

Home Office-Related Expenses

If the business is run from residential premises, then the tax-deductible amount is calculated at the prescribed amount as relates to income tax for small businesses.  However, this amount can only be included in the deductibles if the home office area is less than 300 feet.

Other Investments

Last but not the least, expenses or investments made in educational courses, seminars, and subscriptions to publications that help in enhancing business can also be included in tax deductions.

Conclusion

There are many other expenses that fall within the purview of tax deductions for which a tax consultant is the best guide.  However, small business operators need to be aware of all these tax deductions that are available for them as they help in saving substantial money, thereby increasing the revenue build-up of small businesses.

FAQs

How much income is tax-free for small businesses?

Income up to 2.5 lakhs is the limit for small businesses to be tax-free in India.

Do small businesses pay GST?

Yes, GST is liable to small businesses also in India.

What can small business claim as tax deductions?

Some of the tax deductions that a small business can do are business meals, business insurance, office supplies, work-related travel expense, etc.