INTRODUCTION
The end of the year is coming near and soon you will be closing the fiscal year of your business activities, either as a freelance professional or as a limited company. This is the time to have a look at the status of your accounts to make sure that you finalize the year in the most tax efficient way.
We have compiled below some valuable considerations that can still be implemented before the year closes:
USE TAX BENEFITS AND BONIFICATIONS
If your limited company has not generated a profit yet, but might do so this year, consider that the two years counted from the first profitable year have a reduced corporate tax rate of 15% instead of the normal 25%. If your company is considered an innovative start-ip, these benefits can be extended to 4 years.
If you have started your economic activity as a freelancer, you are entitled to a reduction of 20% of your net income during the first two profitable years in your annual personal income tax statement.
It is therefore interesting to make sure that you profit as much as possible of both years and to apply the reduced rate over a maximum tax base. To this effect, rather book a small loss this year instead of a small profit and maximize the tax base elegible for reduced tax rates next year.
Check if you are entitled to any bonifications for the creation of employment, hiring less capacitated employees, research and development, technological innovation and other bonifications that may apply.
If you are a freelance professional or company of reduced dimensions, make sure to deduct (apart from your regular business expenses) private health insurance fees for you and your family up to €500 per person or €1.500 per person in the case of less capacitated persons .
If you are a freelancer working from home, remember that you can also partially deduct utilities, and meals out of home are deductible up to certain limits. Also remember to deduct the so-called "gastos de dificil justificación" of 5% of net profits up to a maximum of €2.000.
TIME YOUR INCOME AND EXPENSES
Postpone invoicing of sales of services or goods delivered. This will decrease your taxes in the current year but will increase them the following year for the same amount. However, it is always interesting to defer payments to improve your short-term cash flow and inflation will make the real value of postponed taxes less in the future.
Ask your providers to advance invoicing of current or future services or goods received. As before, this will decrease your taxes in the current year but will increase them the following year. In this case however you can and should negotiate payment terms in order not to have a negative cash flow effect and make sure that the goods or services will actually be delivered.
If there are any bonuses or other variable remuneration to be paid to your employees based on results, check if objectives have been reached already and payment can be justified before the end of the year. Alternatively, you can create a provision for these costs as pertaining to this fiscal year but to be paid next year.
If there are any employment regulations or dismissals to be made, it is also interesting to do this before the end of the year to take advantage of the holiday period to reorganize and to be able to deduct dismissal costs and indemnizations this fiscal year.
Finally, Capital Gain Tax will be increased in 2023, so if you want to receive dividends or sell or donate an asset with profit, better to do this in 2022.
MAKE PROVISIONS AND WRITE OFF ASSETS
If there are any other expenses or investments started or realized in this fiscal year but have not been invoiced to you yet, make sure to create the appropriate provisions to lower this year’s tax base. Make sure that you can demonstrate that these costs have been incurred in the current fiscal year through contracts or other valid documentation.
Have a look at your amortizations, some may be liable for accelerated write off that can be taken advantage of to adjust the year end’s result. Alternatively, these can also be delayed for showing a better result if there is a need for this. This is perfectly legal within the amortization bands applicable to the asset and your situation.
Fixed asset purchases up to €300 can be written of freely, up to 100%, with a limit of €25.000 in total for the year. Second-hand assets can be written off with the double of the maximum allowed limit and if your company has a reduced dimension (net turnover below €10 Million), any fixed assets can be written off at double the normal rate as well.
If there are any new assets to be bought or investments to be made on the short term, this is also a good moment to consider doing this still in this fiscal year or to postpone it to the next one.
REDUCE YOUR CORPORATE TAX BASE
Check your non-deductible expenses due to lack of documentation. If there is still any chance of collecting the missing invoices, this is the moment. If not, these expenses will remain non-deductible and will be added to your taxable base for the current fiscal year.
Identify bad debt write-offs of customer accounts and book them before the end of the year to reduce your income and taxable base. You should also issue credit notes to cancel any issued sales invoices that have not prospered.
If you are working with stocks, make sure to book any missing, stolen, or damaged inventory accordingly. Depending on the result you would like to show for this fiscal year you can either increase or decrease stock levels by purchasing more or less, resulting in higher or lower expenses and results for this fiscal year.
If there are intangible assets or investments on your balance sheet, compare their current value and expectations with the value of acquisition and consider if the effect of a possible transmission would be beneficial for optimizing this year's results.
INCREASE CAPITALIZATION AND COMPENSATE LOSSES
If you improve the capitalization of a limited company by increasing the capitalization reserves, it is possible to reduce the taxable base of the company by 10% of the additional reserves provided. These must be clearly identified in the accounts and must be maintained for a minimum of 5 years.
Companies can compensate losses of previous years to reduce their taxable base of this year. Up to €1.000.000 can be compensated without limits, above this amount only 70% of the taxable base can be compensated. Further limits apply for larger companies with a turnover over €20.000.000.
Companies of reduced dimensions con further create a so-called levelling reserve. 10% of this reserve up to a maximum of €1.000.000 can be applied annually to reduce the corporate tax base.
CONCLUSION
There are a number of interesting ways to reduce your taxes that are perfectly legal. Take advantage of the tax optimization possibilities that apply to your situation and make sure to react on time and gather any needed documentation. We are happy to provide further guidance for your particular situation a one-to-one basis!
The end of the year is coming near and soon you will be closing the fiscal year of your business activities, either as a freelance professional or as a limited company. This is the time to have a look at the status of your accounts to make sure that you finalize the year in the most tax efficient way.
We have compiled below some valuable considerations that can still be implemented before the year closes:
USE TAX BENEFITS AND BONIFICATIONS
If your limited company has not generated a profit yet, but might do so this year, consider that the two years counted from the first profitable year have a reduced corporate tax rate of 15% instead of the normal 25%. If your company is considered an innovative start-ip, these benefits can be extended to 4 years.
If you have started your economic activity as a freelancer, you are entitled to a reduction of 20% of your net income during the first two profitable years in your annual personal income tax statement.
It is therefore interesting to make sure that you profit as much as possible of both years and to apply the reduced rate over a maximum tax base. To this effect, rather book a small loss this year instead of a small profit and maximize the tax base elegible for reduced tax rates next year.
Check if you are entitled to any bonifications for the creation of employment, hiring less capacitated employees, research and development, technological innovation and other bonifications that may apply.
If you are a freelance professional or company of reduced dimensions, make sure to deduct (apart from your regular business expenses) private health insurance fees for you and your family up to €500 per person or €1.500 per person in the case of less capacitated persons .
If you are a freelancer working from home, remember that you can also partially deduct utilities, and meals out of home are deductible up to certain limits. Also remember to deduct the so-called "gastos de dificil justificación" of 5% of net profits up to a maximum of €2.000.
TIME YOUR INCOME AND EXPENSES
Postpone invoicing of sales of services or goods delivered. This will decrease your taxes in the current year but will increase them the following year for the same amount. However, it is always interesting to defer payments to improve your short-term cash flow and inflation will make the real value of postponed taxes less in the future.
Ask your providers to advance invoicing of current or future services or goods received. As before, this will decrease your taxes in the current year but will increase them the following year. In this case however you can and should negotiate payment terms in order not to have a negative cash flow effect and make sure that the goods or services will actually be delivered.
If there are any bonuses or other variable remuneration to be paid to your employees based on results, check if objectives have been reached already and payment can be justified before the end of the year. Alternatively, you can create a provision for these costs as pertaining to this fiscal year but to be paid next year.
If there are any employment regulations or dismissals to be made, it is also interesting to do this before the end of the year to take advantage of the holiday period to reorganize and to be able to deduct dismissal costs and indemnizations this fiscal year.
Finally, Capital Gain Tax will be increased in 2023, so if you want to receive dividends or sell or donate an asset with profit, better to do this in 2022.
MAKE PROVISIONS AND WRITE OFF ASSETS
If there are any other expenses or investments started or realized in this fiscal year but have not been invoiced to you yet, make sure to create the appropriate provisions to lower this year’s tax base. Make sure that you can demonstrate that these costs have been incurred in the current fiscal year through contracts or other valid documentation.
Have a look at your amortizations, some may be liable for accelerated write off that can be taken advantage of to adjust the year end’s result. Alternatively, these can also be delayed for showing a better result if there is a need for this. This is perfectly legal within the amortization bands applicable to the asset and your situation.
Fixed asset purchases up to €300 can be written of freely, up to 100%, with a limit of €25.000 in total for the year. Second-hand assets can be written off with the double of the maximum allowed limit and if your company has a reduced dimension (net turnover below €10 Million), any fixed assets can be written off at double the normal rate as well.
If there are any new assets to be bought or investments to be made on the short term, this is also a good moment to consider doing this still in this fiscal year or to postpone it to the next one.
REDUCE YOUR CORPORATE TAX BASE
Check your non-deductible expenses due to lack of documentation. If there is still any chance of collecting the missing invoices, this is the moment. If not, these expenses will remain non-deductible and will be added to your taxable base for the current fiscal year.
Identify bad debt write-offs of customer accounts and book them before the end of the year to reduce your income and taxable base. You should also issue credit notes to cancel any issued sales invoices that have not prospered.
If you are working with stocks, make sure to book any missing, stolen, or damaged inventory accordingly. Depending on the result you would like to show for this fiscal year you can either increase or decrease stock levels by purchasing more or less, resulting in higher or lower expenses and results for this fiscal year.
If there are intangible assets or investments on your balance sheet, compare their current value and expectations with the value of acquisition and consider if the effect of a possible transmission would be beneficial for optimizing this year's results.
INCREASE CAPITALIZATION AND COMPENSATE LOSSES
If you improve the capitalization of a limited company by increasing the capitalization reserves, it is possible to reduce the taxable base of the company by 10% of the additional reserves provided. These must be clearly identified in the accounts and must be maintained for a minimum of 5 years.
Companies can compensate losses of previous years to reduce their taxable base of this year. Up to €1.000.000 can be compensated without limits, above this amount only 70% of the taxable base can be compensated. Further limits apply for larger companies with a turnover over €20.000.000.
Companies of reduced dimensions con further create a so-called levelling reserve. 10% of this reserve up to a maximum of €1.000.000 can be applied annually to reduce the corporate tax base.
CONCLUSION
There are a number of interesting ways to reduce your taxes that are perfectly legal. Take advantage of the tax optimization possibilities that apply to your situation and make sure to react on time and gather any needed documentation. We are happy to provide further guidance for your particular situation a one-to-one basis!
