The French tax authorities have made it possible for taxpayers to carry forward or set off a tax loss from a previous year against subsequent years. In practical terms, this means transforming a tax loss - i.e. the negative result arising from the determination of taxable income for a given year - into a non-accountable expense that can theoretically be allocated to subsequent years. This is achieved by offsetting the previous loss against the profit for tax purposes. Taxpayers commonly use this method.
However, in order to make the best possible use of losses carried forward, it is important to identify the best practices in terms of deduction methods, restrictions or limits on their deduction. To this end, it is particularly important in this tax season to share with our customers a few best practices to adopt when determining taxable income, in order to make optimum use of losses carried forward.
- Clearly identifying usable tax losses
First of all, it should be made clear that the tax loss must be distinguished from the accounting loss calculated on the basis of accounting entries alone, without any restatement of income and expenses for tax purposes. A tax loss results from the negative difference between income and tax-allowable expenses when determining taxable income for the year. Whether a year is profitable or in deficit is determined by reference to the accounting result, increased by extra-accountable additions of non-tax-deductible expenses and reduced by extra-accountable deductions of non-tax-deductible income, before taking into account deficits from previous years.
Therefore, in order to keep track of the stock of available losses, it is advisable to draw up a summary statement of the constitution and allocation of losses carried forward.
- By transforming the tax loss for the year into Deferred Tax Depreciation (D.T.D.) and Ordinary Tax Loss (O.T.L.)
When the taxable income for the year is in deficit, the law allows the company to defer the depreciation properly booked (i.e. in compliance with the rules governing the deductibility of depreciation charges for tax purposes) in respect of that year. The resulting tax loss, comprising the ordinary loss for the year and the deferred depreciation for the loss-making year, can be carried forward to subsequent years.
In summary, the loss carried forward is made up of :
- the ordinary tax loss for the year and depreciation for the year deemed to have been deferred,
- the previous ordinary tax loss not affected by the foreclosure,
- deferred depreciation created in respect of prior years.
- By respecting the order of allocation of losses carried forward
The General Tax Code sets out the conditions and limits for deducting tax losses.
Under the provisions of the aforementioned Code, taxable income is determined by adding back depreciation for the year already booked, when the year is in deficit (in order to defer it in anticipation of a profitable year), or by deducting ordinary losses from previous years not affected by the foreclosure, and then deferring depreciation deemed to have been deferred from previous years, when the year is profitable.
On this basis, a company that posts a loss must in principle apply its tax loss carryforwards in a certain order, as follows:
- First step: defer all or part of the year's normal depreciation up to the amount of the year's tax loss.
- Second step: offset ordinary losses that can still be carried forward.
- Third step: deduct deferred depreciation from prior years' losses
We would point out that if expenses are incurred that are eligible for the tax reduction for investments in Senegal, they will be charged within the time allowed, after the ordinary tax loss carryforwards and the deferred tax assets.
- Respecting the time limit for tax loss carryforwards
A distinction must be made between ordinary deficit and deferred depreciation.
The tax loss can be carried forward successively over the three years following the loss-making year. After this three-year period, the company loses the right to carry forward and offset the loss. This limitation does not apply to the portion of the loss corresponding to depreciation properly booked but deemed deferred during the loss-making period. For this category of loss, the carry-forward period is unlimited in time.
