Tax loss

What it means

A tax loss is a negative tax base - tax-deductible spending exceeds taxable income. It is not the same as an accounting loss in the profit and loss statement, because it appears only after the tax adjustments.

The law allows it to be set against the tax base of later periods, to the extent and within the period set by the Income Tax Act as in force. Claiming it is a right, not a duty, but an unused entitlement lapses when the window closes.

A tax loss should be kept apart from an accumulated accounting loss. The accounting loss is an equity item that the owners cover from profit, reserves or an extra contribution, whereas a tax loss is only an entry in the records attached to the return. Covering the accounting loss with a shareholder contribution therefore neither reduces nor increases the tax loss.

How it works in practice

Losses are tracked by the year they arose and used in that order. The record belongs in the return schedules and is one of the few figures carried from year to year - which is why it is always traced during a handover.

In the books the prospect of a future deduction shows up as deferred tax, provided it is probable that the company will make profits to absorb the loss.

If an older loss is at risk of expiring before the company can use it, it is worth looking at the tools the law offers for moving expenses into later years, such as suspending tax depreciation. We run the projection several years ahead with the client before the return is prepared, not afterwards.

What to watch out for

A loss does not by itself stop tax being payable. Where the law imposes a minimum tax, it is due in a loss year too. And the deduction cannot be applied retrospectively to a filed return without an amended one.

In a merger, amalgamation or division, the loss of the company that ceases to exist may pass to the successor only in part, or not at all. Anyone planning a merger partly with an unused loss in mind should check what happens to it under the current wording of the Act before the plan is approved, or the expected benefit may never materialise.