When a company’s authorized deductions exceed its taxable income, a tax loss must be determined, which can be applied to future years where profits are generated.
How is a tax loss calculated?
A tax loss occurs when authorized deductions (expenses allowed by law that reduce the taxable base) exceed taxable income (income that must be declared for tax purposes) in a given year.
The calculation is as follows:
Tax Loss = Authorized Deductions − Taxable Income
Application of Workers’ Profit Sharing (PTU):
The amount of the tax loss can be increased if the company paid PTU (Workers’ Profit Sharing) in that year. PTU is a constitutional right for workers, and its payment can increase the reported loss.
Applying tax losses in subsequent years:
Tax losses can be offset against taxable profits generated over the next ten years. This means that if a company reports a tax loss in one year, it can reduce future profits with that loss, thus avoiding taxes until the loss is exhausted.
However, if in any given year the company decides not to apply a previous year’s tax loss, it loses the right to use that loss in future years. It is crucial for companies to manage their losses properly to maximize the tax benefit.
Updating tax losses:
Tax losses are updated to reflect the effects of inflation by multiplying them by an adjustment factor. The update is made at two points:
- At the end of the year in which the loss was generated: The adjustment factor is applied from the first month of the second half of the year (usually July) until the end of the year.
- Each time the company decides to apply the loss in future years: It is updated again from the last time it was updated until the first half of the year in which it will be applied.
This ensures that the tax loss maintains its real value, considering inflation.
Limitations on the right to use tax losses:
The right to reduce tax losses belongs to the taxpayer, which means it cannot be transferred to other entities, except in specific cases such as company spin-offs, where the losses are divided between the parent company and the newly created entity.
This division must be proportional to the value of certain assets, such as inventory, accounts receivable, or fixed assets, depending on the company’s main line of business.
Conclusions:
Taxpayers who generate tax losses have the right to apply them, but you must be aware of the restrictions on this application to avoid losing the right. If you have questions about their determination and/or application, we invite you to contact us.
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