What is a tax loss?

If your tax-deductible expenses this year exceeded revenue, you most likely incurred a tax loss. Why am I emphasising tax-deductible expenses? Sometimes you can have an accounting loss without having a tax loss. The difference may be caused by business entertainment expenses, differences between accounting and tax depreciation, fines and penalties, some employee benefit expenses (MultiSport cards, meal vouchers where employees do not contribute), etc. … As a business owner, you rightly see these as expenses, but because they are not tax-deductible, they do not enter the final tax base calculation and therefore the final tax loss. The easiest way is to look at the return. For individuals, the loss is on line 61; for companies, on line 220.

How can I use a tax loss?

You can use a tax loss to reduce tax in the next 5 years and, newly, in the previous two years as well. 

Traditionally, you can claim a tax loss in the following 5 years, i.e. 2021, 2022, 2023, 2024 or 2025. You can use it all at once or gradually. Any unused amount expires. Using a loss can never create a further loss: at most, it brings your tax base down to zero. 🙂

The new feature is carrying it back. In practice, this means you can claim a 2020 loss through supplementary tax returns for 2018 and 2019. This is another form of tax authority support in response to COVID. What is the benefit? If you made taxable profits and paid tax in previous years, the tax office will immediately refund part or all of that tax based on the amended returns. Essentially, it is a way to get money into businesses immediately if they did well in previous years but made a loss in 2020 because of the global pandemic.

Is there a catch?

Yes – there always is one. 🙂

Generally, the tax office has 3 years to assess income tax. In practice, however, it is easier to understand as 3 + 1 years. If an inspection comes in 2024, it goes back 3 years: 2023, 2022 and 2021. But in 2021 you file the return for 2020, so it reaches that year too. What if you use a previous year’s loss (say, from 2016) as a “tax expense” in your 2020 return? The inspectors must be able to examine that loss too, must they not? After all, the business owner is using it to affect tax for 2020, which they are inspecting. They may want to know whether the loss was calculated “correctly” at the time. There is therefore a special rule allowing an inspection to go back to the year the loss arose. In the example above, an inspection can thus reopen all years back to 2016.

What follows from this? If you incur a tax loss, the rule becomes 8 + 1 years. The loss extends the possible inspection period by up to 5 years.

New from 2021.

Yes, there is another new feature: it is possible to waive a tax loss. This waiver first applies to 2020. Within the deadline for filing the ordinary return (1 April on paper, 3 May electronically), you can waive losses from previous years and from 2020. For example, you can waive only a small 2020 loss while “keeping” a larger 2019 loss. Waiving the 2020 loss ends your ability to use it in future, but also shortens the tax office’s period for inspecting your accounts by 5 years (without a waiver, they could inspect 2020 until 2029; with a waiver, only until 2024).

If you use this option, it is irreversible. There is currently no standard form, nor a box to tick in the return itself. When I have used this option for clients, we sent a free-form request to the tax office.

One interesting point to finish

What happens if I carry the loss back? If you decide to file an amended return for either of the previous two years (this year, 2018 and 2019), you can still waive future use of the loss. In other words, it is much more logical to carry the loss back and waive the future right than to wait and claim it in subsequent years.

And what do I think?

If your accounts are properly kept, I would not be afraid of an inspection. If the tax office opens a period, it must inspect the whole of it. This means it often opens periods gradually. If it finds no problem, it has no reason to open all 8 years! It would have to examine and close everything. So my general recommendation is: if the loss is large and cannot be carried back, keep it for future years. If the loss is small and cannot be carried back, consider waiving it so you can have peace of mind sooner. 🙂 I generally consider a loss of, say, up to CZK 50,000 to be small. But everyone draws the line differently! If you are unsure, do not hesitate to get in touch and we can look at it together. 🙂