When a company's authorized deductions exceed its taxable income, we must determine a tax loss, which we can apply in subsequent years in which profits are generated.
How is a tax loss calculated?
The tax loss is generated when the authorized deductions (expenses allowed by law that reduce the tax base) exceed the accruable income (income that must be declared for tax purposes) in a fiscal year.
The calculation is as follows:
Tax Loss = Authorized Deductions - Accumulated Income
Application of employee profit sharing (PTU):
The amount of the tax loss can increase if the company paid PTU (Worker Profit Sharing) in that fiscal year. PTU is a constitutional right of workers, and its payment may increase the reported loss.
Application of tax losses in subsequent years
Tax losses can be reduced from tax profits generated in the next ten exercisesThis means that if a company reports a tax loss in one year, it can reduce its future profits by that loss, avoiding paying taxes until the loss is exhausted.
However, if in any exercise the company decide not to apply a loss from previous years, loses the right to use that loss in subsequent years. It is crucial that companies manage their losses correctly to maximize the tax benefit.
Tax Loss Carryforward Update:
Tax losses are update to reflect the effects of inflation, multiplying them by a update factor. The update is done in two moments:
- At the end of the year in which the loss was generated: the update factor is used from the first month of the second half of the year (generally, 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, taking into account inflation.
Limit on the right to use tax losses:
The right to reduce tax losses belongs to the taxpayer, which means that it cannot be transferred to other companies, except in specific cases such as the spin-off of companies, where the losses are divided between the splitting company and the one being spun off.
This distribution must be carried out in proportion the value of certain assets, such as inventories, accounts receivable or fixed assets, depending on the company's predominant line of business.
Conclusions
Taxpayers who generate tax losses have the right to apply them, however, you must be aware of the restrictions that this application has in order not to lose the right. If you have questions about its determination and/or application, we invite you to contact us.
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