Income tax season often brings stress and confusion for small business owners. While large corporations typically have the resources to manage tax filings through dedicated departments or external advisors, small businesses may struggle due to limited knowledge or manpower. Mistakes in filing income tax returns can not only lead to penalties but also flag the business for scrutiny from tax authorities.
Understanding common pitfalls and how to avoid them is crucial for every entrepreneur. Below are seven key mistakes frequently made by small businesses — and practical tips to avoid them.
1. Not Maintaining Proper Books of Accounts
Many small businesses operate informally and fail to maintain comprehensive records of their income, expenses, purchases, and liabilities. This leads to incomplete or erroneous tax filings.
How to Avoid It:
- Maintain proper digital or physical books of accounts.
- Use accounting software or consult a CA to ensure timely recording of transactions.
- Regularly reconcile bank statements with business records.
2. Missing Due Dates for Tax Filing
Late filing attracts penalties under Section 234F and can lead to disallowance of losses or deductions.
How to Avoid It:
- Mark important tax filing deadlines such as 31st July or 31st October, depending on audit applicability.
- Set automated reminders or subscribe to tax alerts.
- Start collecting documents and data early.
3. Incorrect Selection of ITR Form
Choosing the wrong ITR form — such as using ITR-4 instead of ITR-3 for businesses under audit — is a common yet critical error.
How to Avoid It:
- Understand the nature and size of your business.
- Refer to the latest CBDT guidelines or consult a CA to pick the correct form.
4. Not Reporting All Sources of Income
Some businesses forget to declare:
- Interest from savings accounts
- Capital gains from asset sales
- Rental income or freelance income
How to Avoid It:
- Prepare a comprehensive income summary before filing.
- Include incomes shown in Form 26AS and AIS (Annual Information Statement).
5. Claiming Ineligible Deductions or Missing Eligible Ones
Errors include claiming ineligible expenses (e.g., personal expenses) or forgetting valid ones like:
- Section 80C investments
- Section 80JJAA (for hiring new employees)
- Depreciation on fixed assets
How to Avoid It:
- Keep a checklist of deductions applicable to your business.
- Use tax computation tools or seek expert advice.
6. Ignoring TDS and Advance Tax Requirements
If you don’t deduct TDS from payments or don’t pay advance tax on time, it can result in interest and penalties.
How to Avoid It:
- Understand TDS applicability on salaries, contractor payments, rent, and fees.
- Estimate your advance tax liability quarterly and pay it within due dates.
7. Filing Without Verification or Review
Submitting a return with errors due to lack of review or verification is a common oversight.
How to Avoid It:
- Always double-check figures, PAN, TAN, and bank details.
- Get returns verified digitally or through Aadhaar OTP.
- Take a professional’s help if unsure.
Conclusion
Income tax compliance doesn’t have to be overwhelming. By avoiding these common mistakes and staying proactive with documentation and timelines, small businesses can file accurate returns and steer clear of penalties. Engaging a Chartered Accountant for guidance is a smart investment that saves both time and trouble.
