Add-back items

What it means

Add-back items are the amounts by which the accounting profit is increased on the way to the tax base. They include non-deductible expenses such as entertainment, fines and stock shortages above any compensation, provisions and valuation allowances the Act does not recognise, and the gap between book and tax depreciation.

They are not accounting entries. Nothing in the ledger is rewritten: the items are set out in the tables of the tax return and, together with the deductible items, they bridge the profit shown in the accounts and the tax the company actually pays.

An add-back need not be an expense. Income that never appeared in the books as revenue can also raise the tax base, for example a price adjustment on a transaction with a related party where the price was not set as independent parties would have set it.

How it works in practice

The largest group is costs that become a tax-deductible expense only once paid: advisory and legal services, marketing studies and market research, brokerage commissions, contractual penalties and late-payment interest. Unpaid on the last day of the year they are added back, and in the year of payment they are deducted instead.

A bookkeeper collects them through the year rather than at the close: analytical accounts for entertainment, fines, unrecognised provisions and non-deductible fuel turn the reconciliation into a routine. A permanent difference such as entertainment creates no deferred tax, while a temporary one from depreciation or allowances does.

At year end we go through the list of provisions and impairment allowances and check for each whether the law accepts it as a deductible expense. A provision for untaken holiday, for instance, is added back in the year it is created and deducted in the year it is released, so the tax comes out right in both years.

What to watch out for

A December invoice for legal services paid only in January and then overlooked understates the tax base by its full amount. An audit adds it back, assesses the tax and charges late-payment interest, although the company lost nothing: the cost simply belonged in the following year.

The opposite mistake is adding an item back and forgetting to deduct it the next year. With temporary differences, such as unpaid late-payment interest or a non-deductible provision, an add-back in one year belongs with a deduction in another; without the records we also keep for deferred tax, the company pays tax on the same amount for good.