A notice can be sent to enterprises that have submitted a profit and loss statement to the tax service at a loss, with a request to explain the reasons for its formation. Otherwise, if the taxpayer fails to provide the necessary information, the tax inspectorate may decide to conduct a field audit or, in extreme cases, to liquidate a legal entity. To ignore such a "sign of attention" is not recommended. This article will examine in detail how to write an explanation for the loss tax. A sample will be given at the end of the article.
How to behave?
and it’s not a secret for anyone that not a single chief accountant wants his company to be on the list of “lucky ones” for conducting field events to check the financial and economic activities by tax authorities. But what should he do if the annual report is at a loss, and the tax inspectorate requires clarification of the reasons for its occurrence?
In this situation, there are two behaviors:
- leave the annual report as it is, but at the same time you need to correctly and convincingly write explanations for the losses of the enterprise;
- artificially correct reporting so that loss-making ultimately “disappears”.
Having chosen one or another option, you should understand what tax risks can expect you and what consequences they can bring for the enterprise.
If you have at your disposal all the properly executed documentation that can confirm the validity of the expenses incurred, then there is no need for an artificial adjustment of the statements, that is, the losses of the enterprise need not be removed, as they will be lost for you forever. In this situation, it will be more appropriate if you prepare an explanation for the tax loss. A sample of such an explanatory note will be considered below.
But sometimes there is no way to explain the causes of the negative balance. Then you can correctly correct the profit and loss statement and thereby hide the loss. But you must understand that deliberate misrepresentation of accounts can result in fines for the enterprise. It will be better if you look at it again before submitting tax reports to see if you have taken into account all income.
What are the criteria for companies that show a loss?
As a rule, these are three types of losses:
- a rather large loss;
- the loss is repeated for two tax periods;
- the loss was shown last year and in the interim quarters of the current year.
What do newly registered companies do? Typically, a loss for new ventures is a common occurrence. In addition, tax legislation requires that expenses be taken into account in the period in which they are formed, despite the fact that income has not yet been received. If the company was created and during the same year received a loss, then tax authorities, most likely, they will not consider it as a problem.
However, if you show a loss for more than one year, the inspection will require you to explain the reasons for this situation, as it may consider that you intentionally reduce profits. Therefore, we recommend that if you have a loss, hand over the balance sheet and income statement with an explanatory note, this will allow you to avoid unnecessary questions.
What indicators pay attention to tax when checking a loss-making company?
- The ratio of borrowed to equity.It is considered acceptable if the amount of equity is more than borrowed. It will be better if the growth rate of borrowed capital will be less.
- The growth rate of current assets. It is considered normal if this indicator is greater than the growth rate of non-current.
- At the growth rate of receivables and payables. These indicators should be almost the same. Tax officials may be interested in the reason for the increase or decrease in these indicators.
What should an explanatory note about losses look like?
How to write an explanation to the tax office? As such, there is no standard form, explanations are written in any form on the official letterhead of the enterprise and are fixed by the signature of the head. The note is drawn up in the name of the head of the tax office, which sent a request for clarification of losses.
The main emphasis in the letter should be made on explaining the reasons for the formation of a negative financial result. It is very important here to back up all the words with facts that influenced the situation when the company’s expenses exceeded revenues. It is very good if the company has documents with which you can confirm that this is a normal business activity aimed at making profit, and there will be no losses in the next reporting period. To prove that you have taken a number of steps to achieve positive results, you can attach a copy of the business plan, a breakdown of accounts payable and other similar tools to the explanatory note.
What are the reasons for the loss in the explanatory note?
We will name the main reasons that can be used as an example of an explanation of losses.
Explanation 1. Price reduction for goods, works and services sold
The reasons for this decline may be the following factors.
1. The selling price is reduced due to lower market prices or a decline in demand. The consumer will not buy a product with a price higher than the market price, and if you sell it at a loss, you can get at least some revenue and not lose even more. This explanation can be supported by the following documents:
- the order of the head to establish new prices and the reasons for such changes;
- a report from the marketing department, which will reflect the situation on the market and provide an analysis of the decrease in demand for goods shipped by the enterprise.
2. The product expires. To prove this reason, you can attach the following documents:
- act of the inventory commission;
- an order from the head to lower prices for goods.
3. Buyer rejection of the order. You can justify this reason by attaching termination agreement or an official letter from the buyer in which he writes about his refusal.
4. The seasonal nature of the goods, work and services sold. Seasonal fluctuations in demand are characteristic of such areas of activity as construction, tourism, etc. To justify this reason, you will also need an order from the head to lower prices.
5. The decline in prices is due to the development of a new market. In this case, your arsenal should include marketing research, plans, development strategies. It will not be superfluous if you provide copies of supply contracts to new points of sale or documents for opening a new unit in another region.
Note 2. Decrease in sales or production.
To such an explanation of the loss, you can attach a report on a decrease in the volume of products, work performed and services or on a decrease in sales of products in quantitative terms.
Explanation 3. The need for work or activities that require large one-time expenses
This can be repair of equipment, office, warehouse and other facilities, as well as all kinds of research, licensing, etc. To justify these costs, you should have primary documents on them, such as contract agreements, estimates, invoices and other similar documentation.
In the event that the tax office requires clarification of losses in the reporting for the quarter, six months or nine months, you can refer to the explanatory note that the financial result of the enterprise is formed with a cumulative total for the year. And so the situation with him may still change before the end of the year.
Explanation 4. Force Majeure (flooding, fire, etc.)
In this case, you should have a certificate from the state agency that recorded this situation. You will also need the conclusion of the inventory commission on the losses incurred as a result of the disaster.
Sample Explanatory Note
For a clear understanding of how to write explanations to the tax on losses, the sample presented below will help us.
To the chief
IFTS of Russia №6
in Kazan
Skvortsov A.S.
EXPLANATIONS
Having studied your requirement regarding the provision of explanations explaining the formation of a loss, LLC Romashka reports the following.
During the nine months of 2014, LLC Romashka’s revenue from product sales amounted to 465 thousand rubles.
The costs recorded in tax accounting amounted to 665 thousand rubles, including:
- material costs - 265 thousand rubles.
- labor costs - 200 thousand rubles.
- other expenses - 200 thousand rubles.
Compared to the same period last year, these costs increased by 15 percent, including:
- material costs - by 10%;
- labor costs - by 4%;
- other expenses - by 1%.
From these indicators it can be seen that the increase in expenses of the enterprise was mainly associated with an increase in prices for materials and raw materials necessary for the production of our products. In addition, it is worth noting that the company in order to motivate its employees increased salary costs.
Also, due to the situation on the market and the level of competition, the Company was not able to carry out a planned increase in prices for goods sold.
In connection with the foregoing, it can be argued that the loss is a consequence of objective reasons.
Further, you can include a description of the further development of the enterprise in the explanations in the tax loss. Sample similar description:
Currently, the company’s management is already negotiating, the purpose of which is to attract new buyers and customers, and the issue of improving products is also being considered, which will increase the company's income by several times. The company plans to achieve a positive financial result already in 2015.
Explanatory Note on Taxes
Currently, enterprises may be required to provide an explanation of VAT tax. This is the case if, when sent to them revised declaration the amount of tax payments is less than that specified in the original version.
An explanation of VAT, as well as an explanation of losses to the tax, is drawn up in any form and is supported by the signature of the head of the organization. It indicates the indicators that have changed in the declaration, which have become the reason for reducing the amount of tax. Among other things, it will not be superfluous to indicate the reason according to which other information was indicated in the initial declaration. This may be a calculation error due to a lack of understanding of the law or a program malfunction and other similar factors.
