Loss carry back in corporate tax
On 1 July of this year the loss carry back was introduced. Both for companies as for individuals. The name is misleading: you do not actually deduct the loss of this year from the profit of the previous year. No, you go back to the previous year and foresee an untaxed reserve. The trick is to reserve to correct amount.
A very technical story
The loss carry back is not as simple as it seems. From a tax point of view, you should, in your tax return on the 2019 income, transfer an amount (your estimated loss) from a taxed reserve to an untaxed reserve.
To put it simple: In 2019, you have a taxable profit of 1.500. You planned to distribute 500 as dividend, and to book 1.000 to a taxed reserve.
But then came corona and you want to apply the loss carry back. You estimate the 2020 loss to 750.
Step 1: no dividend can be distributed. This is a condition to apply this measure.
Step 2: you transfer 750 from the 2019 taxed reserve to an untaxed reserve. Consequently, your profit in 2019 is 500 dividends which should also be reserved and 250 of the already foreseen taxed reserve. Your untaxed reserve amounts to 750.
For the 2021 tax return (income 2020) you will, as foreseen, book a loss of 750. But the untaxed reserve will become taxable. Both will compensate each other. By doing so you have mathematically deducted the 2020 loss from the 2019 profit. In case the loss would be even higher (e.g. 900), the untaxed reserve will make sure that for the 2020 income you will have only 150 (900-750) deductible loss.
In case your loss is lower, you will pay tax on the positive difference, plus some kind of fine since you pay your taxes too late.
The transfer from the taxed to the untaxed reserve should not be reported in the bookkeeping. This is no accounting, but a mere tax operation. Therefore, you should add a 275 ODD statement to your tax return, so that the tax authorities can better follow the composition of the reserves.
For accounting purposes, you should also make an estimate of the taxes you will have to pay. Since for accounting year 2019 you will transfer a part of the taxed reserves to an untaxed reserve, there is a fair chance that your estimate is too high. However, you should not amend the estimate in the annual accounts.
From 29,58% to 25%
Most probably you remember that the tax rate reduction was one of the pillars of the corporate tax reform of 2017. The tax rate with respect to the 2019 income/tax year 2020 is 29,58%, while for 2020 it is 25%.
Does this mean that you can deduct the 2020 losses at a higher rate (i.e. the rate for the 2019 income)? No. And to realize this you should add the tax reduction advantage to the 2020 profit through the rejected expenses in the tax return for the 2019 income. In the situation whereby the rate decreases from 29,58% to 25%, the advantage equals ((29,58% - 25%):25% = 18,32%). This rate is applied to the advanced loss deduction and by doing so it is added as rejected expenses. On these rejected expenses, you will pay 25% tax, and so the tax authorities compensate the tax rate reduction advantage. But in case your company has right to a reduced tax rate, the calculation of the advantage becomes way more complicated.
The most difficult issue is probably the estimation of the loss you will suffer.
After all, you should estimate today your loss at the end of the accounting year. With respect to the corona damage of the last couple of months, that amount you probably know. But what with the following months? Will there be a catching-up or not? Will the pandemic during the last quarter still throw a spanner in the works?
In case of an overestimation you will have a tax increase for personal income tax purposes which can run up to 18% and for corporate tax even up to 40% (the lowest rate is 2%). The applicable rate depends to the extent you overestimated the loss. A tolerance of 10% applies.
Prepayments and deductions
By applying the loss carry back in 2019 you will pay less taxes than foreseen, hence you probably made too much prepayments. These can be recovered faster.
On the other hand, you should also take a look at your 2020 prepayments. Has a possible loss been taken into consideration? Did you take into account that, due to the loss carry back you will still pay more taxes than expected?
Finally, you should take into account that due to the reduction of the taxable profit for 2019 you may miss some tax deductions. For personal income tax these can be e.g. pension savings or other tax reductions. But we also know tax reductions for corporate tax, e.g. investment deduction and the transferred investment deduction.
By reducing the taxable profit in 2019, you risk losing these.
The loss carry back is not necessarily a wonder solution. It is especially important to 'accurately' calculate the advantages and disadvantages of your best guess of a future loss.
As the model of the tax return form for both personal and corporate income tax is already fixed, the carry back must be requested and justified in a separate form that has been available since the end of August.