Finance options for properties -The Hindu Property Plus article by CA G Karthikeyan

Housing finance is an area where ambiguities exist – the very first, perhaps, is that housing finance can mean different things to different people.

Buying a house may be the dream of a lifetime to some, to some others it may be a tax planning instrument and to still others it may be just an investment – depending upon their income bracket.

When the objective of the investment itself differs from person to person, their perception of financing the investment and the cost will also vary.

The fact that the layman is not aware of the labyrinth of rules and regulations to be complied with prior to construction only adds to this and makes the situation complex and open to misinterpretation.

Housing costs have skyrocketed. At the same time, housing remains one of the basic requirements of every human being.

People buy apartments, invest in land, or prefer to build a home on the piece of land they call their own. While buying an apartment is comparatively easier, building from scratch entails a lot of ground work. One of the most important processes to be completed before the construction can start is to get an approval for the construction from the local/city municipal corporation.  This can be a taxing process in every sense.

Assuming that someone has constructed a home and simply wants to add a room or two more, the same laborious process of getting approvals must be followed again.

Obtaining approvals for additional construction is taxing because the additional built up area may not be substantial but the process of obtaining the approval could prove to be expensive.

Additionally, if the house owner wants to finance the construction with a loan from the bank, the approval becomes a must as no bank would advance funds against unapproved construction. Most house owners prefer to avoid the hassle of obtaining the additional approval and prefer instead to either finance the construction from own funds or to borrow from private financiers/housing finance entities. It goes without saying that these entities charge exorbitant rates of interest and escalate the cost of construction manifold.

The dilemma, of course, is to determine how to obtain affordable finance as well as timely approvals. Considering that affordable finance depends upon approved constructions, it would be a good idea to set up a single window clearance for additional construction approvals sought at the municipal corporation level.

This would ease the glitch and allow faster movement of papers for approval.

It would also serve a two-fold purpose in that it would encourage people to seek approval and prevent unapproved construction while at the same time ensuring availability of affordable housing finance.

It must be noted that currently unapproved constructions constitute a significant portion of the housing scene in India. While one does not endorse unauthorised or unapproved construction, it must also be said that easing of the rules will, to a large extent, lessen/resolve this issue.

(G. Karthikeyan, a Coimbatore-based chartered accountant)

Small Business - Tips to plan your taxes for 2012

Tax laws are subject to change every year, allowing individuals and small business owners to plan how their tax savings can pan out. For any business, big or small, a diligent approach to tax planning is sure to open up new tax saving avenues, taking advantage of the business deductions for which it qualifies.

This article is an attempt to trigger meaningful discussions between the tax payer and the tax advisor, looking to create awareness about potential benefits of tax planning.

A few aspects which will substantially impact your business are listed below:

1. Follow your tax laws closely | Hire consultants

As long as your tax filing is appropriate, there will be no roadblocks. However, for inappropriate filings, say, incorrect computation of sales tax, payroll tax & income tax, penalties, fines and punitive interest costs will add up. In case you do not have in-house assistance or unable to spend time on tax research to evaluate your business’s financial situation throughout the year, a CPA can help, by reviewing your overall position and providing you with the expert tax planning counsel you need today and in the years ahead. By combining unrivaled education, training and experience with a focus on your financial situation, a CPA can recommend sound strategies designed to make your goals a reality.

2. Make use of deductions | Expense related

Some deductions you should research on and take advantage of are automobile deductions, home office deductions, travel expense and entertainment expense deductions. Utilizing deductions helps to deduct business costs from gross income. Section 179 deductions apply to most tangible personal business property in service during the tax year, such as computers, office furniture, vehicles and machinery. These provide immediate tax relief on newly purchased equipment, helps improve cash flow and increase investment options for small businesses.

3. Classify your business | Different types have varied tax rates & liabilities

Proper classification of your business can help in reduction of your tax rates. You will be best advised to research on various types of businesses and what type your best fit is. Some business classifications are Sole Proprietorship, Partnership, Limited Liability Corporation, S-Corp, C-Corp among others with special tax statuses for some of them.

4. Plan for the future | Beware of tax traps

Ask yourself the following questions, and come up with viable plans for the future:

1. Have I created the most tax efficient type of business?
2. What is the best tax efficient way to save for my retirement?
3. What is considered a reasonable salary by IRS standards?
4. In case I wish to expand my business across states, what are the stipulations on multi-state taxability?
5. Is there a requirement to report my foreign assets? Non-disclosure may lead to onerous penalties from IRS. Take care if you own a bank account, real estate, business or other assets in a foreign country.
6. What is the IRS purview on business succession – most effective way to leave behind a business while avoiding a huge tax bill?

4. Pay out taxes in installments

In case you face difficulties in paying your taxes in full, you can negotiate a deal with the IRS wherein monthly repayment is possible. This will be beneficial especially for small business owners. Choose the right payment plan based on your need and eligibility. However, be wary of interest payments that might harm your business. 

  

Budgeting for a small business

Budgeting might seem an overtly complex exercise for some business owners. However, there are no hidden demons in budgeting if a realistic estimate of spending is made possible and priorities clearly established.

A few common budgeting pitfalls to avoid are listed below for a better understanding and utilization of the budgeting process:

Underestimating the costs:

Almost all businesses have a set of supplementary or ancillary costs that often go unnoticed and do not always make it to the budget. For instance, every time you purchase a new software or equipment, although the cost of equipment might figure in your purchase, the associated costs such as training, time and maintenance costs involved in the process might have missed the bus, thus resulting in an underestimation of the actual costs involved.

No Budgeting:

The biggest mistake of all budgeting short sights is to go about your business with no idea about the profitability in the future with no quantified predictions. Bills come in, checks go out – yet, it is a monotonous process with no order to the exercise.

Non Prioritization / Non-objective planning:

The business will go to waste if there is no concrete business plan attached to it. Without clear goal setting, priorities cannot be set on your spending / purchasing. Setting goals and not tying your expenditures to them is an exercise with even lesser value.

Scrutinize all expenses, make the best choice:

As a small business owner, you can least afford to lose money. Budgeting is the best time to compare estimates to actual pay-outs, and adjust the figures accordingly. For instance, if a website maintenance service is costing you $1,000 a year, and a similar service is offered at $500, you can take time to scrutinize the individual service offerings, and decide to eliminate on the additional costs incurred.

Monitor your cash flow:

Keep a close watch on your inflows and outflows, and ensure your budgeting helps focus on projecting future cash flows too. A budget with emphasis only on expenses and ignorance towards revenues will fail miserably in projecting cash flows. Keep having periodic checks to ensure your revenues match your expenses – else, it is a disaster-in-waiting for your small business.

Focus on what really matters:

Ensure you do not spend similar amounts of time on each item on your budget. Rather, spend the maximum time on those items that drive your profitability and business viability.

Bring in a flexible approach:

A good business is one which is flexible. For instance, if the actual revenue is not as expected, be prepared to trim down on your expenses. Here, it is crucial to follow a strategy where you overstate your expenses and understate your expected revenues. While a no-frills-attached approach to expense planning is a good idea, also set aside income wherever possible. In most unimaginable ways, such money set aside can bail out your business in the future. It can also serve as a contingency fund to dip into in case of budget overruns. 

Use your budget as a limiting exercise, not as the LIMIT:

Sticking sincerely to your budget is fine, but do not it act as a constraint. It should act to restrain your spending, but do not get too stiffened up on it. An unplanned trip to a trade conference or a valuable seminar will fetch you precious contacts although the expenses may be unbudgeted. Be prepared to go beyond your budget when a valuable investment comes knocking.

Get in touch with us at GKM for discussions on setting up a budget for your business requirements. We are here to help you grow your business.