If a business operates at a loss for a long time, this creates serious problems for its owners. Working capital is being consumed, expenses have to be cut, which can cause valuable employees to quit and equipment to become unusable.
But, among other things, a negative financial result also entails tax consequences. Moreover, sometimes not only negative, but also positive for a businessman. Let's consider how unprofitable activities affect the company's tax burden.
What happens when filing an income tax return if there is a loss?
A tax loss is a negative result that arises in line 100 of sheet 2 of the declaration when the income of the reporting period does not cover the expenses taken into account for tax purposes. It is not prohibited by law. But tax authorities, as a rule, do not trust information about losses, suspecting that the organization, for example, has inflated expenses, or has hidden part of the proceeds, or is using other schemes to artificially reduce income taxes. Therefore, tax services not only send the taxpayer requests for additional explanations on such a declaration, but also create special commissions to verify unprofitable reports.
For more information about what a tax loss is and how its amounts will be used, read the article “Tax loss is...”.
So if a taxpayer has filed a tax return with a loss, then he may well be called to the so-called loss commission by the Federal Tax Service.
To learn about the form used to prepare the 2020 return, read the material “How to fill out an income tax return for the year.”
If you have access to ConsultantPlus, check whether you correctly reflected the loss in your income tax return. If you don't have access, get a free trial of online legal access.
Conclusion
The resulting losses not only worsen the financial position of the organization, but can also lead to problems with the tax authorities.
Inspectors suspect any unprofitable company of using illegal tax evasion schemes.
To avoid an on-site inspection, a businessman should prepare reasoned explanations and convince officials that the losses were caused by objective reasons.
If the taxpayer’s arguments were sufficiently weighty, then in the future the “confirmed” loss can be used to reduce the tax base.
What the tax authorities don’t like about a loss
The main task of tax inspectors is to monitor the tax collection process in order to replenish the budget. To achieve this, tax services are developing a number of special measures, the implementation of which should contribute to the timely receipt of taxes, fees and other obligatory payments to the budget.
In their work with taxpayers who have shown losses, tax authorities rely on clause 1 of Art. 2 of the Civil Code of the Russian Federation, which contains a definition of the essence of entrepreneurial activity as independent, carried out at one’s own risk and aimed at systematically generating profit. Therefore, if an organization regularly shows losses, then, according to inspectors, it is most likely unscrupulous.
What are unprofitable commissions?
These are special commissions created under the Federal Tax Service to consider issues such as the completeness of payment of taxes and contributions on wages and monitoring the validity of losses from financial and economic activities.
In Moscow, for example, these commissions operate on the basis of the order of the Federal Tax Service of Russia for the city of Moscow dated February 22, 2008 No. 96, which approved a new edition of the order of the Federal Tax Service of Russia for the city of Moscow dated April 18, 2006 No. 240, that is, these structures have existed for many years. The activities of such commissions are regulated by letter of the Federal Tax Service of Russia dated July 17, 2013 No. AS-4-2/ [email protected]
Before calling a taxpayer to a commission, tax authorities collect information to control the risks of unprofitability, conduct counter audits, and receive bank statements. Next, they will have to analyze these documents along with the organization’s reporting. If the taxpayer is identified as having a sufficiently high degree of risk, the inspectorate will send him an information letter in which the organization will be asked to independently check its calculations and submitted reports in order to reduce losses and assess its risks using known methods.
The taxpayer must receive the letter no later than a month before the date of the planned call to the commission. Within 10 working days after receiving the letter, the organization must either submit an updated declaration, reducing the loss, or respond to the tax authorities, providing the Federal Tax Service with convincing explanations for the loss that has arisen. If within 10 days the taxpayer does not take any action in response to this letter, the tax authorities will send him a notice of summons to the commission.
In addition, if the organization does not respond to the letter at all, then the directors can be fined up to 4,000 rubles (Article 19.4 of the Code of Administrative Offenses of the Russian Federation). Inspectors have the right to call taxpayers in order to obtain from them explanations on the calculation and payment of taxes and fees, and taxpayers are required to appear when called by tax officials (subclause 4, clause 1, article 31 of the Tax Code of the Russian Federation).
What happens if the taxpayer does not appear at the commission meeting?
For example, according to clause 10 of the order of the Federal Tax Service for Moscow dated February 22, 2008 No. 96, if authorized representatives of the taxpayer ignored a call to a meeting of the working group of the commission in the inspection without explaining the reasons, or if they refused to comply with recommendations for changing tax and (or) indicators financial statements, then the tax services are allowed to carry out priority on-site tax control in relation to such taxpayers and inform the owners about the unsatisfactory financial condition of the organization.
Tax services believe that they have the right to file a demand in court to liquidate the organization and initiate bankruptcy proceedings (however, the courts often recognize this possibility as unlawful), as well as send materials regarding such a taxpayer to law enforcement agencies.
The tax authorities summon the head of the taxpayer to a loss-making commission only in writing. The letter is drawn up on a special form (order of the Federal Tax Service of Russia dated November 7, 2018 No. MM-7-2/ [email protected] ). No verbal invitations should be accepted.
The head of the organization called to the commission meeting can invite his employees there, who will help him give the necessary explanations. Representatives of the organization are recommended to take with them documents that will help confirm the correctness of calculation and payment of income tax and explain the resulting loss.
Representatives of tax services during the commission meeting will demand to justify the reasons for the losses, and if the explanations provided do not convince them, they will most likely offer to submit an updated declaration without loss.
N. N. Taktarov, 3rd Class Advisor to the State Civil Service of the Russian Federation, answered some questions from taxpayers. The official's response is available in ConsultantPlus . Learn the material by getting trial access to the system for free.
Sample explanatory note
For a clear understanding of how to write explanations to the tax office regarding losses, the sample presented below will help us.
To the boss
Inspectorate of the Federal Tax Service of Russia No. 6
in Kazan
Skvortsov A.S.
EXPLANATIONS
Having studied your request regarding the provision of explanations explaining the formation of the loss, Romashka LLC reports the following.
During nine months of 2014, the revenue of Romashka LLC from the sale of products amounted to 465 thousand rubles.
Costs taken into account in tax accounting amounted to 665 thousand rubles, including:
- material costs – 265 thousand rubles.
- labor costs – 200 thousand rubles.
- other expenses – 200 thousand rubles.
Compared to the same period last year, these costs increased by 15 percent, including:
- material costs – by 10%;
- labor costs – by 4%;
- other expenses – by 1%.
From these indicators it is clear that the increase in the company’s expenses was mainly associated with an increase in prices for materials and raw materials necessary for the production of our products. In addition, it is worth noting that the company, in order to motivate its employees, increased wage costs.
Also, due to the market situation and the level of competition, the Company was unable to implement the planned increase in prices for the goods sold.
In connection with the above, it can be argued that the loss is a consequence of objective reasons.
Next, you can include a description of the further development of the enterprise in the explanations for tax losses. An example of such a description:
Currently, the management of the enterprise is already conducting negotiations, the purpose of which is to attract new buyers and customers, and is also considering the issue of improving the products, which will increase the income of the enterprise several times. The company plans to achieve a positive financial result based on the results of 2015.
In what cases can a loss be inevitable?
Let's imagine that the organization was registered relatively recently. Even if it has already concluded contracts and has begun to implement them, the result (revenue from the sale of goods, work, services or other activities) may appear much later than the end of the reporting period. In this case, naturally, the organization will suffer a loss.
True, regarding this situation, the Ministry of Finance and the Federal Tax Service of the Russian Federation have repeatedly explained in their letters that losses arising from newly created organizations are allowed to be taken into account in the future (letters of the Ministry of Finance of Russia dated August 26, 2013 No. 03-03-06/1/34810, dated September 20. 2011 No. 03-03-06/1/578, dated 04/21/2010 No. 03-03-06/1/279, dated 07/17/2008 No. 03-03-06/1/414, letter of the Federal Tax Service of Russia dated 04/21/2011 No. KE-4-3/6494).
How best to explain a loss to tax authorities
The Resolution of the Plenum of the Supreme Arbitration Court of the Russian Federation dated October 24, 2006 No. 18 states that making a profit is the goal of entrepreneurial activity, and not its obligatory result.
You can substantiate losses by collecting evidence that the organization conducted ordinary business activities, the purpose of which was to make a profit, and explain why this activity did not bring profit.
The reasons that led to the loss determine which “exculpatory” documents are needed in each specific case. Let's look at them:
- Development of new types of activities. Here, the supporting document will be a business plan, which will show that losses are related to the specifics of the new activity and are planned in advance for the first few years. The business plan should also show when the investment will begin to pay off.
- Unprofitable sale of goods. In any organization, situations may arise when goods are sold at a price below cost. The fact of such sales must be confirmed by an act of the inventory commission and an order from the manager to reduce prices, drawn up on the basis of this act. The act must provide data on the quality of the product, its properties and characteristics, as well as the reasons why this product cannot be sold at a profit; cite the conclusions of the inventory commission that in these circumstances the organization has to make a sale at a loss.
- Dumping policy. Let's say a company decides to oust competitors and expand its sales market through a temporary reduction in prices, planning to significantly increase future sales volumes due to this. These intentions must be substantiated through the organization’s marketing policy, through a business plan and a sales market development plan. The expected effect of these activities must be shown in numbers.
- Changes in supplier prices. Let's assume that a long-term contract with fixed prices (let's say in rubles) has been concluded with the customer. According to the terms of the contract, upward price revisions are not provided. And the contract with the supplier is in foreign currency (imported products). A loss here may arise due to fluctuations in exchange rates. If the question arises about why the organization did not terminate the contract, which suddenly became unprofitable, it is necessary to provide the tax authorities with evidence that, by terminating the contract, the organization would have suffered even greater losses in fines. And a profitable customer, with whom there may be other contracts or prospects for contracts, would be lost.
- The customer (buyer) refused the previously concluded contract. Or, a similar situation, when the termination of economic relations occurred due to a change in the owner of the customer. In these situations, it is necessary to present to the tax authorities an agreement to terminate the contract, correspondence with the former counterparty in connection with a change of owner, and correspondence with counterparties regarding the conclusion of new contracts.
- Force majeure (flooding, fire, office destruction, etc.). In this case, you need to have a certificate from the government agency that recorded this situation, and be sure to draw up an inventory list in connection with the losses.
Well, if the income tax loss ended not in the year, but in any of the intermediate periods, it is important to convince the tax authorities that since the final calculation is made based on the results of the year, and the organization has to close a large contract at the end of the year, then there is no reason to doubt that the year ends with a profit.
How does a loss affect the organization's activities?
A loss in the general case is the difference between the income and expenses of a business entity with a negative value. This concept is enshrined in Article 274 of the Tax Code of the Russian Federation. The difference between income and expenses is determined within the framework of taxable income and accountable expenses (Chapter 25 of the Tax Code of the Russian Federation). In accounting, the concept of loss is not given, but it is also understood as a negative difference between income and expenses. Directly, income and expenses are formed monthly in accounting accounts 90 “Sales”, 91 “Other income and expenses”, and the loss of the reporting year in account 99 “Profits and losses” and ultimately, at the end of the reporting year, is reflected in the debit of account 84 “ Retained earnings (uncovered loss).” Income and expenses are taken into account in accounting on the basis of the provisions of the Order of the Ministry of Finance of Russia dated 05/06/1999 No. 32n “On approval of the Accounting Regulations “Income of the Organization” PBU 9/99” and the Order of the Ministry of Finance of Russia dated 05/06/1999 No. 33n “On approval of the Regulations on accounting "Expenses of the organization" PBU 10/99". The final financial result of the activity of a business entity is reflected in the Statement of Financial Results in the line “Net profit (loss)”. The final financial result in accounting and tax accounting may differ, since the rules for accounting for income and expenses in accounting and tax legislation differ. “A loss is not always a loss” It is impossible to talk about the unprofitability of a legal entity’s activities only based on the fact that at the end of the financial year a negative financial result was obtained, as well as the presence of an uncovered loss in the balance sheet. This is due to two factors. The first factor is that domestic legislation establishes such a concept as the value of net assets, the value of which will indicate the success of economic activity. The legislator understands net assets as assets that would remain in the organization after repayment of all obligations (clauses 4-6 of Order No. 84n of the Ministry of Finance of Russia dated August 28, 2014). That is, net assets are own funds. The second factor is related to the overall results of the activities of a legal entity, calculated on the basis of a financial analysis of activities over time. For example, based on the results of the analysis, it was concluded that the loss in the reporting period decreased by 2 times compared to the previous period, which, of course, will indicate positive dynamics of activity in general. Financial analysis can be carried out both on the basis of balance sheet data and on the basis of the income statement. You can analyze a fairly large number of indicators both vertically (determining the structure of final financial indicators, identifying the impact of each reporting item on the result as a whole) and horizontally (comparing each reporting item with the previous period), both in dynamics and using coefficients . Let's turn to the financial results statement, which is one of the main components of reporting as a whole, and shows the change in capital under the influence of income and expenses. The information presented in the report as a cumulative total of the reporting year allows us to assess the efficiency of the enterprise. Evaluation and analysis of report articles makes it possible to draw a conclusion about the economic situation of the organization, assess profitability and financial stability, and form an idea about the further development of the organization. Let's look at the resulting loss from the outside. The main indicators of the study of asset efficiency: - profit (loss) from sales received for the period; — profit (loss) before tax received for the period; — net profit (uncovered loss) received for the period; — profitability (loss) indicators. Profitability (loss) indicators characterize the efficiency of using assets and the sources of their formation. Profitability refers to the efficiency, profitability, profitability of an enterprise or business activity. It is possible to draw a conclusion about the efficiency of resource use, since the calculation may involve not only a profit indicator, but also a loss indicator. Accordingly, the profitability indicators calculated in this way must be greater than zero, and in this case the assessment of the dynamics of the indicators will have a positive value, even though a loss may be incurred. Close attention of tax authorities Losses received by an organization may attract the attention of the tax inspectorate. One of the reasons for auditing tax authorities is low profitability, as well as the reflection in tax reporting of losses for two or more years (Concept of a planning system for on-site tax audits, approved by Order of the Federal Tax Service of Russia dated May 30, 2007 No. MM-3-06 / [email protected] “On approval of the Concept of the planning system for on-site tax audits”, hereinafter referred to as the Concept). The provisions of the Concept are related to the criteria for self-assessment of risks, among them there is such a criterion as the reflection of losses over several tax periods in accounting or tax reporting. Of course, for the tax authorities, tax reporting is of greater interest, rather than accounting reporting, especially since a taxpayer can reflect a loss in the financial statements, but in tax profit, and this does not contradict the law. However, even if only a loss is reflected in the financial statements, regulatory authorities may invite the organization’s management to a “loss commission”, where they will be asked to explain the reasons for the losses, because the activities of a commercial organization are aimed primarily at making a profit, as indicated in paragraph 1 tbsp. 2 Civil Code of the Russian Federation. When conducting a desk audit of the annual income tax return, the tax authorities may request additional documents from the taxpayer, which will show the reasons for the difference between tax and accounting profits. It is worth noting that the taxpayer’s arguments based on clause 7 of Art. 88 of the Tax Code of the Russian Federation, about the lack of the right of inspectors to request accounting documents, is not confirmed in practice (Resolution of the Federal Antimonopoly Service of the Moscow District dated June 17, 2010 No. A40-80121/08-90-407, Resolution of the Presidium of the Supreme Arbitration Court of the Russian Federation dated March 15, 2012 No. 14951/11 in case No. A40-54354/10-4-301). In addition, tax authorities calculate the profitability of the enterprise. The goal is to compare it with the average profitability for the industry, the deviation of which should be no more than 10%. Otherwise, the organization will be a candidate for an on-site tax audit. Profitability is calculated based on financial statements, so there are cases when disputes with tax authorities about low profitability have to be proven in court. An example is the resolution of the Federal Antimonopoly Service of the Moscow District dated November 9, 2010 No. A40-175533/09-35-1333 and dated May 4, 2010 No. A40-114683/09-4-826. Thus, the resulting loss may be “dangerous” not only from the point of view of the further activities of the organization itself, but also from the point of view of the close attention of the tax authorities. “Fighting” a loss So, the organization has received a loss, and regardless of whether it calculated positive or negative results using financial analysis indicators, it is necessary to make management decisions about increasing profits and avoiding losses. In itself, a loss based on operating results is not so terrible if timely measures are taken to identify the reasons for its occurrence, as well as measures aimed at optimizing it. Let's consider possible options for increasing profits. However, some of them may seem “out of reach”, and there will be some truth in this. Increase sales revenue while maintaining the organization's costs. This can be achieved by increasing sales. What is the problem: When developing a strategy, it is necessary to remember that the market can be fairly balanced between supply and demand, and the desire to increase sales can lead to overstocking for the seller himself. What to do: In this situation, a thorough study of the market, including in the regions, is necessary. and, as a last resort, by increasing the cost, of course, if this is possible under market conditions. In addition, an increase in sales can be achieved with a flexible marketing policy. The marketing policy itself will not only be a customer loyalty program, but will also be aimed at eliminating tax risks when providing discounts and bonuses to customers, since tax authorities often closely monitor pricing and try to “prove” that the taxpayer has received an unjustified tax benefit. Judicial practice also testifies to this, for example, the Resolutions of the Supreme Court of Ukraine dated 02/11/2015 in case No. A34-2255/2014, the Supreme Court of the Russian Federation of 03/03/2016 in case No. A43-14608/2013. It is advisable to provide for the following provisions in the accounting policy: product policy, pricing policy, sales policy, promotion policy. Cost reduction. What is the problem: Depending on the type of activity, the cost price is different. For example, in a trading company, the cost consists of the purchase price of goods, transportation costs, employee wages, including costs associated with contributions to state extra-budgetary funds, and rent. For such a company, optimization can achieve savings in all of these areas. What to do: For example, analyze transportation costs, and perhaps change the transport company to one with lower delivery costs, or consider investing in your own transport. All directions must be carefully analyzed to make a decision.
Results
A loss in the income tax return will result in the taxpayer being summoned to a special commission at the Federal Tax Service to give explanations. Tax authorities believe that, due to the implementation of Article 2 of the Civil Code of the Russian Federation, any business is created for the purpose of making a profit, and its absence is a reason not to pay taxes. The article discusses in detail the algorithm for explaining losses.
Sources:
- Tax Code of the Russian Federation
- Civil Code of the Russian Federation
- Code of Administrative Offenses
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Explanatory note on taxes
Currently, businesses may be required to provide an explanation to the tax office regarding VAT. This is the case if, when sending them an updated declaration, the amount of tax payments is less than that indicated in the original version.
The explanation for VAT, as well as the explanation for losses to the tax office, is drawn up in any form and supported by the signature of the head of the organization. It indicates the indicators that have changed in the declaration, which became the reason for reducing the tax amount. Among other things, it would not be superfluous to indicate the reason why different information was indicated in the original declaration. This may be an error in calculation due to misunderstanding of legislation or program failure and other similar factors.
