Tax Loss Carryforward: Principle and Example

carry forward

Tax losses incurred by legal entities subject to income tax (IS) may be carried forward or backward under certain conditions.

The transfer of tax losses is carried out without time limit, but not more than 1 million per financial year within 50% of taxable profits over 1 million.

On the other hand, tax loss carry forward or refund is limited to the last closed financial year.

Tax loss is calculated on Form 2058-A (Normal Real Regime) or Form 2033-B (Simplified Real Regime) of the company’s tax return.

It should not be confused with the accounting loss for the year, which is recorded in the accounts and displayed in the annual accounts for the year.

Tax loss carry forward: principle

Paragraph 3 of article 209 I of the French General Tax Code (CGI) provides that a tax loss for one financial year is an expense of the next financial year and can therefore be set off against profit for that financial year.

In accounting, losses do not affect the result of the next financial year. They simply reduce the share capital by transferring the accounts of the new debtor or creditor.

The benefit of carrying forward is to eliminate or at least reduce corporate tax for future years.

Financially, the rule is completely different. The tax loss can be carried forward to the tax profits of subsequent years indefinitely, subject to the limitation rule.

As soon as a company subject to corporate tax makes a profit of more than 1 million, the carry forward of losses (section 209.1 CGI) from the previous financial year is limited. Thus, if the deficit recorded for the fiscal year exceeds the threshold of 1 million and, accordingly, the profit for the fiscal year also exceeds this threshold, then the company will have to pay corporate tax in the amount of 50% of the excess. . In addition, the part of the deficit that cannot be deducted can be carried forward to subsequent years indefinitely, subject to the threshold rule.

However, the balance of the unallocated deficit may be carried forward to subsequent financial years under the same conditions. This is not lost on the pretext that the distribution of the profits of the fiscal year has been limited.

If there is a waiver of debt under a collective procedure (approval of a settlement agreement, guarantee, receivership, liquidation or, more broadly, an insolvency procedure referred to in Annex A to Regulation 1346/2000/EC of May 29, 2000), the ceiling 1 million increased by debt cancellation.

Deficit Carryover: Numerical Example

The company realizes a deficit of 5 million during the financial year. 1 million was moved back to allow him to create corporate tax debt.

The balance of 4 million has been carried over.

Over the next financial year, the company earns a taxable profit of 3 million. Half, or 1.5 million, comes from the refusal of the loan.

Calculation of losses carried forward outside the collective production:

1 + 50% of (3 – 1) = 2 million conventional

Carryover Deficiency

4 – 2 = 2 million

Calculation of losses carried forward in case of collective proceedings

1 + 50% of (1.5 – 1) + 1.5 = 2.75 million

Carryover Deficiency

4 – 2.75 = 1.25 million

How to account for deficit carryover?(loss recognition carried forward)

Unlike a carry-forward, tax loss carry-forward is not recognized. As soon as we talk about taxable income, the carryover deficit is tracked in the package’s tax tables.

It is for this reason that it is often recommended to look at the previous year’s tax return so as not to forget it in the event of a programming error or when transferring from one year to another.

Only a negative accounting result can be assigned to the new receivable transfer account, that is, account 119 (or reduce account 110 of the new payable transfer).

Consequences of deficit carryover

Deficit transfer allows not only to reduce the tax on imputation profits, but also to reduce the amount of the social contribution to corporate profits by 3.30%.

Finally, this distribution reduces the share of employees in profits, calculated in accordance with legal regulations.

Loss of portability

The possibility of deficit transfer (IS) is not unlimited. There are situations when the transfer is no longer possible. In this case, tax losses are lost. This loss of transferability is explained by the corporate identity rule, namely that company losses can only be transferred within the respective company.

Several situations lead to the loss of this right, in particular the termination of business. This discontinuance covers hypotheses of a change in corporate form leading to the creation of a new legal entity, a change in the tax regime, a change in corporate purpose or actual activity, the disappearance of capital goods and, finally, mergers and similar transactions.

In the event of a merger, the losses of the merging company may be transferred to the acquiring company.

Conversely, some situations do not result in the termination of loss carryforward, such as leasing a business or suspending operations.

Previous years’ deficits then become so-called non-values, and the company only benefits from tax deferrals on unrealized capital gains and profits under Article 221 bis CGI.

The transfer of business is also characterized in the event of the disappearance of the means of production for a period of more than 12 months. This provision is intended to counter the practice of buying out dormant companies in order to capitalize on their loss carry forward. A derogation is provided in case of force majeure or when the company obtains an administrative permit under certain conditions.

In the same way, a change of activity cannot be considered as the termination of activity under certain conditions. This is the case, for example, provided that the operations are necessary to continue the activity or maintain employment.

Right to collect from the tax administration

Within their right to a refund, the tax authorities may challenge the carry forward of losses for a financial year, even if provided, provided that the losses are carried forward to profits of the financial years. However, the tax administration can only correct unregistered fiscal years.

In order to avoid doubts regarding the carryover to the next financial year, taxpayers must submit regular and complete reports. Thus, they will be able to justify the presence of a deficit carried over, even if this deficit is more than 10 years old, and the limitation of the period of storage of accounting documents cannot be assigned to the tax authorities (section L.102 B). LPF). If such records are not kept, taxpayers can by any means prove the reality of the deficit.

If taxpayers comply with their accounting obligations, the administration must provide evidence of incorrect entry resulting in an unjustified deficit, or it may ask the taxpayer to justify itself.