What to do if the company "appeared" a decent income tax payable? Or a huge downside?

It is good if the company has regulated the issue of tax planning, and the company’s management has data regarding tax expenses, at least in the short term. But as practice shows, often when preparing tax reports, that is, when the period is already closed, the line “tax payable” shows a decent amount of tax liabilities. And reasonably the philosophical question arises: What to do?

This is exactly the situation the owner (the COO) of a small grocery store chain found himself in when he saw the 2021 income tax return. Of course, he could have used the most common way, “purchasing” services from individual entrepreneurs, and increased his expenses. But there are several significant drawbacks to this method, so he chose a different route. 

After studying the company’s balance sheet carefully, he came to the conclusion that he needed a source of permanent tax expenditures that would not require the flow of “living money”, and would be regulated and legal. 

Such an expense, which works online and does not require funding, is depreciation deductions. Simply put, depreciation deductions are part of the value of a company’s noncurrent assets (real estate, equipment, furniture, machinery, tools, etc.) that are included in expenses each month, reducing income taxes. 

He remembered that he and his co-founder had bought most of the trade equipment in their own name, with their own money. Therefore, it was decided to increase the authorized share capital, and to make additional contributions in the form of trade equipment. Read more about how it works below.

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Bold tax decisions: only under the supervision of a lawyer!

Since the registration of an increase in the authorized share capital is only possible after all members have made their contributions in full, the founders quietly contributed almost all the equipment under the act of acceptance in February 2021, and the rest was added in January 2022. After that they registered the appropriate changes in the Unified State Register. 

As a result of this process, the company recorded the receipt of commercial equipment, and, since March 2021, legally formed the cost, which reduced income tax for 2021 in the accounts. 

The owner, aka the COO, was satisfied with the result twice: 

• a large amount of money has been saved for now;
• a solid foundation has been laid for future savings.  

It is important to note that the amount of the abovementioned costs depends on the value of the equipment and on the period of operation, i.e. possible variants “from... and ....to”. Each case is reviewed and estimated by a lawyer.

And what if the tax documents show the company's loss?

Of course, a decent amount to pay in income tax is upsetting, and it’s understandable. By the way, everyone understands a decent amount in his own way. But tacitly, in the tax world there is an unwritten rule: income tax should not be less than 1% of income. They say that if the company does not fit into this “formula”, it can be checked, and then it will have to pay considerably more. 

Many managers are afraid to show losses, that is, to file a “minus” income tax return. 

In this case you should answer yourself honestly: are you ready to confirm and defend your losses to the tax authorities? Given the ambiguous tax legislation, you can always find something to pick on. In practice, there are three options:

• Leave everything as it is, i.e., declare a loss in business activities;
• Make an “intentional” error in the statements and forget about it;
• Make an “intentional” error, but then correct it, for example, when a decent tax is due in a future period, it will be possible to cover it with a “hidden minus”.

Please note that your actions should by no means violate the law and cause a negative reaction from the tax authorities. Such operations can be carried out only after consulting a lawyer and estimating all possible risks.

There is no general solution to this issue – “how to reduce income tax” or “how to hide a loss”. To make the best decision in each situation, you need to consider many factors and always work with professionals. 

However, you should remember that every problem has a solution and we will help you find it.

Please see the cost of tax optimization here.

Everything about taxes and accounting in Ukraine here.