Total amount of income - Limitation in considering losses from business operations possible?
April 8, 2017 | 100,00 EUR | answered by Steuerberater Peter Jansen
Initial situation 2016 (simplified):
Civil servant A14, salary 65,000 €, additional income from side business 3,000 € = non-self. income 62,000 €.
Additional income from business operation (sole proprietorship trade as a side job).
In 2016 loss -85,000 € (income statement, actual taxation). Reason: Purchase of goods for stock and deliveries to customers in 2016, payment only in 2017.
Tax consequences in 2016:
Total income amount -23,000 €, i.e. Tax payable 0 €, tax refund approx. 20,000 €.
Due to basic tax-free allowance, only 8,652.00 € of the loss in 2016 do not have any tax effects and 53,350 € only at the average tax rate of approx. 19% (for income of 62,000 €). Remaining loss carryforward (or loss carryback) then 23,000 €, trade tax 0 €.
The business is designed for profit, i.e. higher profits are expected in subsequent years. Therefore, in the following year 2017, the increased income from the sale of pre-paid stock items in 2016 will lead to a significantly higher average tax rate.
Example calculation for 2017 (assumption: Profit in 2017 equals the loss in 2016: +85,000 €, otherwise same income as 2016):
Non-self. income 62,000 € + business profit 85,000 € - loss carryforward 23,000 € = 124,000 € total income amount 2017
==> Average tax rate approx. 33% (for income of 124,000 €), i.e. 42,000 € and thus tax payment of 22,000 € plus 6,500 € trade tax.
Tax difference compared to a uniform distribution of profit for 2016 and 2017: 8,500 €
(22,000 € + 6,500 € taxes 2017 - 20,000 tax refund 2016).
Question:
Is there a possibility, possibly deviating from the cash flow principle, to limit the loss in 2016 from the business operation when considering the total income amount for 2016 (ideally to 0 €), i.e. a significantly higher loss carryforward, to offset it only with corresponding profits from the business operation in subsequent years? Could possibly § 163 AO "Deviation from tax assessment for reasons of equity" be applicable and how would it be requested if so? Are there any restrictions due to administrative regulations in NRW?
Or are there possibly other design options?
Dear questioner,
I am happy to answer your question taking into account the rules of this internet platform.
In the context of loss deduction in the area of income tax, the following steps should be taken (§10d EStG):
In the year of the loss, unbalanced negative earnings are relevant for the loss deduction when determining the total amount of earnings. The deductible negative earnings relate to all types of income.
Negative and positive results from different sources of income of different types of income are to be offset without limitation in terms of amount. For the year 2016, this means in your case:
Income from business activities amounting to - €85,000 is offset against positive earnings from employment amounting to €62,000. This results in an unbalanced loss (correctly calculated) amounting to - €23,000 when determining the total amount of earnings.
The loss deduction does not affect the income determination itself, but is carried out from the total amount of earnings before deductions for special expenses, extraordinary burdens, and other deduction amounts. These may not be used if necessary. This is what the legislator intended and implemented.
You now have the option of carrying back the loss. You can carry back the non-deductible loss to the preceding year 2015. This results in an immediate tax effect. This is initially carried out by the tax office. However, you have the option to waive this in full or in part. The amount of the total earnings for the year 2015 is important for this. The loss carry back can be limited so that an income tax rate of 0 euros is achieved taking into account special expenses, extraordinary burdens, and other deduction amounts.
If this option of loss carry back is not exercised, the loss is carried forward to the following years.
Thus, the possibilities of loss deduction are exhausted. Even in the context of income determination (you seem to determine the profit from business activities through income-expenditure accounting), this is not possible. The principle of income and expenses according to § 11 EStG regarding business income and expenses must be observed.
A limitation of loss deduction in the year of origin 2016 is therefore not possible. Unfairness in tax collection according to § 163 AO is not present in your case.
I hope I could help you.
Peter Jansen
Tax advisor
