Year-end Tax Considerations for 2018

With the year 2018 drawing quickly to a close it is important to keep in mind the tax and accounting implications of having a business, as always. Although, unlike previous years the year-end close of 2018 will be especially important considering recent social and economic duress that has significantly changed various economic sectors within the country. The financial position that businesses will close out on in this year will be pivotal in decision making for 2019

Pay any pending vendors

Tax legislation creates a distinction between the treatment that is to be given to businesses that have revenues equal to or more than C$ 12 million córdobas a year compared with those that don’t meet that threshold. In fact, for businesses that gross less than C$12 million córdobas the law stipulates in article 35 of the Tax Concertation Law (Ley de Concertación Tributaria) that the annual income tax declaration will use the taxable base that results from the difference between paid incomes minus paid expenses by year-end (December 31^st).

What does this mean? This means that as we draw closer to December 31^st as a business owner you need to be mindful of any expenses that are pending to be paid – are paid. The fact of the matter is that if for any reason you forget to pay a bill or vendor before the end of the month of December, then unfortunately that expenses will not be deductible for the 2018 tax declaration.

In fact, should you become aware of any expenses that aren’t due until January, but you have the opportunity to pay them now in December then the expenses can be deducted in 2018 instead of having to wait until next year.

Make sure expenses are adequately supported

It is unfortunate, but many businesses lose money because of not taking the time to properly support their expenses. This shouldn’t happen there really isn’t a reason for it other than not having the patience to make sure all supports are complete and are in compliance with tax legislation.

Referring back to the Tax Concertation Law (Ley de Concertación Tributaria) article 39 and 42 provides the requirements needing to be fulfilled by supporting documents so as to be considered deductible expenses. Also, in the bylaw of the Tax Concertation Law, article 31 mentions important additional considerations not mentioned in the law cited above.

The requirements of both Tax Concertation Law and corresponding bylaw are as follows:

1. Expenses and costs incurred need to be necessary and normal to produce taxable income;

2. The taxpayer has the obligation to effectuate and PAY to the tax administration the withholding tax deducted from the provider at the time of payment.

3. All accounting transactions need to have their respective supporting documents, without exception.

4. Supporting documents need to have the name of the taxpayer and their cedula or RUC number.

This basic criteria is paramount to keep in mind and an occasional review or supporting documents for important expenses is recommendable, especially prior to closing the year so as to avoid erroneously declaring deductions that later on may be overturned by the tax administration during audit resulting in fines.

Make final inventory count…on time!

One of the very last things that will need to be done before entering January 1^st, 2019 will be the final inventory count. Of course, depending on your business you may be able to for your inventory count in the final days leading up to December 31^st or on the day of after having served your last customer.

In referring again to the Tax Concertation Law Bylaws article 33 mentions that businesses that utilize inventory so as to establish net profit each year will need to do a physical inventory count. The tax administration then provides the taxpayer a period of 30 days to then report the results of the final inventory count through the electronic tax reporting portal.

Inventory is no simple matter, neither in keeping track of it throughout the year, nor reporting it at the end of the year. Keep in mind that         the Tax Administration has a vested interest in corroborating the accuracy of a taxpayer’s inventory numbers. This is because inventory is pivotal in establishing the net profit of any business and thereof the tax basis that the taxpayer will be taxed.

To avoid any foreseeable problems with inventory and reporting it for the tax period of 2018, we strongly recommend that if your business manages inventory, to take care of your year-end obligations in this respect sooner rather than later.

Carrying forward losses

Every once in a while it is inevitable that a business experiences a loss.  This is simply a result of the unpredictability of variables that most of the time are impossible to mitigate completely. If your business in the 2018 tax suffered a loss it is understandable. Nonetheless, it is important to know how a loss should be managed, reported and upon improvement of economic conditions be amortized.

The Tax Concertation Law mentions in article 46 that net operating losses from prior years can used as a deduction when calculating current year profits. This is very important because in effect the tax law is permitting taxpayers to offset current profits and pay less tax by deducting prior losses.

A lot of times the deduction of prior losses is because during those years a taxpayer may have reinvested into their business. Nonetheless, there is no condition to the application of this article that specifies that due to an economic downturn and loss of revenues that the business cannot later on deduct those losses.

So if your business lost money this year, for whatever may be the reason, it is important to calculate, monetize and report losses so that in the future you can lower your taxes.

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At SAENICSA | Accounting & Tax Services since 1995 we have provided accounting, tax and payroll services to our clients. If you have any questions in relation taxes or obligations that businesses need to comply with, feel free to CONTACT us.