Many people have experienced a high cost of goods sold due to continuous inflation. This dilemma not only affects households but also small businesses. Uncontrollable increases in expenses can sometimes lead to company losses, making it challenging for businesses to survive. In such situations, some small businesses even consider closing down, but that’s not always the best option. At EndureGo Tax, we always advise our clients that their business journey doesn’t have to end there. We can help transform company losses into tax benefits.
How to turn company Loss to Benefit?
One effective accounting technique to reduce tax liability is the loss carryforward method. This method transfers current-year net operating losses to profits in future years. For example, if your business incurs a loss of $100,000 at the moment and in the next two years, you earn a $100,000 income, you can deduct the previous loss from the operation costs contributing to your taxable income. As a result, your taxable income will become zero, and you won’t have to pay tax.
Meeting Ownership Test for Loss Claims
To claim these losses successfully, it’s crucial to meet the same ownership test. This means that the shareholder cannot undergo excessive changes. The Income Tax Assessment Act 1997 (ITAA97) may provide exceptions for certain instances where the nature of the business remains the same, or the activities conducted are consistent with the past. However, if you change the majority of your company’s ownership, the loss can become trapped, and you may lose the opportunity for tax benefits.
Real-World Case: Helping Clients to turn company Loss to Benefit
For example, at EndureGo Tax, we achieved retaining a 400k business loss for one of our clients by helping them correct their mistakes when they mistakenly transferred the wrong shares out. In their case, they could not carry a loss because they accidentally changed the shareholder. We spent time understanding the situation, then talked to ASIC to correct the mistake as they did not intend to change the shares. In the end, we assisted them in carrying forward the 400,000 loss, which resulted in a huge tax benefit, as it can be used to reduce 400,000 taxable income.
Government Measures to Support Small Businesses
In 2018, the government introduced a new measure that helps small businesses. For instance, if your business incurred a loss of $10,000 in 2022 and you had paid tax in 2018, 2019, 2020, and 2021 amounting to $5,000, you can claim back 25% of the $10,000 as a refundable tax offset. However, certain eligibility criteria set by the government must be met to avail of this benefit. We assist business owners in making the best decisions for their company. We strive to turn company losses into benefits as much as possible, enabling their businesses to continue moving forward.