In an uncertain and ever-evolving economy, it is not unusual for businesses to operate at a loss, or experience an impact to their bottom-line. While it is useful to do a timely review of your business to see if you have a temporary cash flow problem on hand, it is advisable to get professional help to remedy the situation. This is because besides optimising cash flow, one of the ways to ease the pressure is to manage business losses well.
Treatment of Business Losses
There are three main ways to treat your business’ losses. You can carry forward your business’ unutilised capital allowances and trade losses in order to setoff its future income (i.e. loss carry-forward), transfer unutilised CAs and trade losses to related companies (i.e. group relief), or offset its current period losses against previously paid taxes (i.e. loss carry-back).
Treating Unutilised Losses
When filing your business’ taxes, ensure that you claim tax-deductible expenses in order to reduce the amount of tax your business has to pay.
For Sole Proprietors/Partners/Self-employed:
If you find that there are trade or business losses after deducting allowable expenses, the trade losses and any capital allowances claimed can be used to offset your other income such as employment, interest, rental income, and income from your other businesses in the same year.
Even if your other income is not sufficient to offset your trade loss, you can carry forward these unutilised or unabsorbed trade losses and capital allowances to subsequent years to offset against the income of those years, until the trade losses are fully utilised. However, you must be carrying on the same trade, business or profession at the point when the unabsorbed capital allowances are utilised.
Similarly, companies can also offset trading losses against all incomes in the same accounting period. Trading losses can be offset against any income, be it income from dividends, interest income or rental income.
Any unutilised tax losses can be carried forward indefinitely and offset against future trading profits.
However, losses of pure investment companies may not be carried forward. Pure investment companies are companies whose activities are confined to holding investments and deriving income from investments in the form of dividends, interests or rentals.
Carrying Back Unutilised Losses
Another way to treat business losses is loss carry-back. Loss carry-back allows businesses to offset current period losses against previously paid taxes. This will help businesses tide over economic downturns.
This means that any unutilised trade losses and capital allowances in the current year can be carried back for one Year of Assessment (YA) immediately preceding the YA in which the trade loss and capital allowance arose. However, take note that the maximum amount of loss and capital allowance allowed for carry-back is capped at $100,000.
Similarly, you must be carrying on the same trade, business or profession at the point when the unabsorbed capital allowances are utilised.
As announced in Budget 2020, businesses may elect to carry-back unutilised capital allowances and trade losses from YA 2020 up to three YAs immediately preceding YA 2020 (i.e. YA 2017, YA 2018 and YA 2019).
For New Start-Up Companies:
If you are a new start-up company, you may qualify for the Tax Exemption Scheme for New Start-Up Companies. In which case, the qualifying deductions (i.e. current year unutilised capital allowance and/or unutilised trade losses) will be first used to set off against your assessable income for the YA (third YA) immediately preceding the YA of loss.
This means that, if the chargeable income is nil after deducting the loss carry-back relief, your company will not be able to enjoy the benefit given under the Tax Exemption Scheme for New Start-Up Companies for that particular YA(s).
If there is chargeable income after deducting the loss carry-back relief, your company can claim exemption under the Tax Exemption Scheme for New Start-Up Companies.
If there are more than one company under the same group, you can tap on Group Relief. Group Relief enables companies to deduct (i) unutilised capital allowances, (ii) unabsorbed trade losses and (iii) unabsorbed donations of the current year of one company from the assessable income of another company in the same group, in that order.
Up to 100% of a company’s loss items can be transferred, as long as the claimant company can absorb the losses. Both companies must also have the same accounting year end. If they do not have the same accounting year end, they will have to change their accounting year end to coincide with each other to enjoy the Group Relief.
|Adjusted loss of current year||($100,000) *|
|Unabsorbed losses of prior years||($80,000)|
|Less: Unabsorbed capital allowances of prior years||$70,000|
|Less: Current year capital allowances||$120,000|
|Current unabsorbed capital allowances||$110,000 *|
In this example, both the adjusted loss (i.e. current year unabsorbed trade loss) of $100,000 and current year unabsorbed capital allowances of $110,000 are available for transfer.
Items such as the unabsorbed losses, capital allowances or donations of prior years, losses of foreign branches and loss items in respect of activities that are wholly exempt from tax are not allowed to be transferred. For more information, please refer to IRAS’ guidelines.
Seek Guidance from a Qualified Tax Professional
It is important that your company manages its tax matters efficiently to avoid paying more taxes than it should. At Corporate Services Singapore, we offer a comprehensive suite of corporate secretarial services and cost-effective outsourced accounting and tax services to businesses in Singapore. Our highly experienced tax specialists will work closely with you to treat your business losses, optimise your taxes and keep your business tax-compliant.