Dear CAs. In my sole proprietorship, which deals in IT services, I am thinking to construct property. I have ideas for two types of property to construct: - Office space for my sole proprietorship (including purchase of plot). - Rental property on a plot that I own. Are these valid expenses for a sole proprietorship (the sole proprietorship's income will be reduced by the amounts spent on the property), or is there something I need to be aware of? What is the status of this property if I chose to close down my sole proprietorship in the future? Thanks
Hii
Hope you are doing well!!
Property is considered as fixed assets not as expenses thus amount spent on construction/ buying is asset and you can claim depreciation on it.
in above case there is no difference between proprietary or any other type of business concern
- In terms of taxability of income there is no difference between sole proprietorship and individual. All income whether of sole proprietorship or individual are taxable under PAN of individual only. Sole proprietorship is just a business constitution if individual wants to carry business or profession. Only expenses icurred for the profession/business are allowed against business income. Personal expenses are not allowed. Plot or/and office space are fixed assets. Only depreciation is allowed on the building and not on land. Rental income from plot will be treated as income from other sources.
- Whether you are registered under GST or not?
You can construct the office space on your own property and claim depreciation as an expense for the same. You won't get depreciation on the plot.
I did not understand the second option of a rental property on your own plot.
Yes claiming depreciation of office building is a valid expense.
If you close down the business it will again be considered as your personal property.
Hope you find the information helpful, if yes do rate if 5 and provide your valuable feedback for my improvement.
Thank you.
The construction expenses are capital expenses and depreciation at the rate of 10% can be claimed against income each year. The entire property cannot be claimed as expenses nor the construction cost. For the rental property do you mean that you would be giving the property on rent?
If you close down business, this can be still your asset.
In case of detailed consultation, request a call back
Regards
Thank you for good input. Follow-up question: I would like to understand capital expenses and fixed assets. How do they impact income taxes in the sole proprietorship? An example for a FY: * Revenue is 50 lakh * Salaries, office rental, etc amounts to 20 lakh * Remaining 30 lakh are spent on construction of office space (or rental property) What will be the income taxes for this FY? (and, is it the same for any kind of capital expenses, e.g. if sole proprietor takes car for business?) Thank you.
- Only revenue expenses incurred for business are allowed against business income. Expenses incurred on capital assets are allocated by way of depreciation. Salaries, office rental, electricity etc are revenue expenses. Expenses incurred on car, laptop, software, building are capital assets. Dep. on building is 10% , car @ 15%, laptop and software @40% on WDV basis.
- Rs. 3 lacs would be allowed as expense by way of dep. on building in first year and later on WDV basis.
For detailed discussion you may opt for phone consultation.