Small business tax deductions

In the process of corporate planning, the main responsibility for smoothly running the business in normally vested with the top management. Among the various factors which are taken into consideration for discharging the responsibility a company?s management, has to consider taxation as one of them. ?Taxation? is basically an environmental factor. No doubt, it is a threat because every assessee is supposed to pay tax on income but at the same time it is also an opportunity in the sense that, the taxation Act of each and every country provides a number of sections and provisions which allow exemptions, deductions, rebates, reliefs through which an assessee can reduce his tax burden and thus make tax savings resulting in capital formation.

However, let us pay an attention on the concept of ?business?. According to section 2(13) of Income Tax Act, 1961 business includes ? i) trade, ii) commerce, iii) manufacture and iv) adventure or concern in the nature of trade commerce and manufacture. It covers every facet of an occupation carried on by a person with a view of earning profits. The profits that arise from any kind of business is therefore, chargeable to tax under the head ?profits and gains from business or profession?.

The bulk of corporation tax revenue is derived from large corporations, but smaller corporations but smaller corporations from the bulk of corporate taxpayers. If we indicate this in terms of percentage, then we can say that, the large corporations pay at a rate of 34% where as only 15% and 25% are applicable to the small corporations.

The rationale underlying progressive rates for the individual income tax can not be applied to the corporate sector. It can not be said that progressive taxation of firms is a means to progressive taxation of shareholders. There is no positive relationship between the size of the corporation and the net income of its owners. There are many small corporations, that are owned by high income individuals and a substantial share of dividends are received by middle individuals.

The progressive tax structure must be based on a desire to restrain ?bigness? and to support small firms. Restraining bigness differs from restraining monopoly. Here the former is of absolute size while the other is a matter of market share. If in any case, the bigness is to be restrained, progressive tax may be called for but such a tax would be related more appropriately to asset size rather that to profits. On the other hand, if the bigness is held undesirable there is no reason to choose big unprofitable firms. The economic case for restraining bigness is, always a debatable value.

Nevertheless, tax relief for small firms has always been a political issue. This position may partly be justified to offset the superior ability of large firms to operate in imperfect capital markets and to benefit from restrictive practices.

For these as well as other reasons, the preferential treatment of small business is always been an ever-present topic of tax reform.

According to law, corporations along with not more than ten shareholders for the election of taxation on a partnership basis. Under this option, no corporation is paid in subchapter ?S? of the Internal Revenue Code. Instead, current profits are imputed to the shareholders whether it is distributed or not. That is why, the corporation is considered as the pass through mechanism only. On the other hand, the shareholder is given the tax advantage of a partnership, without losing the protection of limited liability. Here it is mentionable that, this option is mainly advantageous to the shareholders of the modest income whose individual income tax rate is low and who wish to receive their investment returns in current income.

The profits of lower rates of corporation tax on initial amounts of income primarily accure to small corporations. However, for large corporations, this is not very significient. The difficulty with the lower initial rate is that, it can readily serve as a shelter from individual income tax. A further difficulty arises because larger corporations are induced to split into multiple unites (to spin off) so as to benefit from the application of lower rates. The law attempts to avoid such abuses by imposing a penalty tax on personal holding companies with ensure that relief to small business is not converted into relief to high-income owners.