date | theme

08. June 2020 | Reducing Sales Tax: What Consumers Should Know Now

08. June 2020 | Change in the 2020 VAT rate: reduction from 19% to 16%

10. June 2020 | Corporate tax for partnerships as a new alternative

12. June 2020 | Loss carryover 2020: increase of the maximum amount to 5 million euros (this contribution)

As a further stimulus measure of the Grand Coalition, the increase of the loss carry-back to 5 million euros is planned. So far, the loss relief was limited to only 1 million euros. The government coalition is thus trying to absorb the influence of the COVID19 pandemic on the German economy and strengthen it for the future. In order to take into account the financial impact of the corona pandemic in the taxation of entrepreneurs, the increase in loss recovery is a welcome relief. In many cases, the new scheme will lead to a retrospective tax refund. In addition, there is also the tax means of loss carry-forward, which will probably also be used by many entrepreneurs in the future. This instrument to relieve the economy is complemented by the possibility of creating a so-called corona reserve in the tax return for 2019. The reserve shall be dissolved by the end of 2022.

The Income Tax Act stipulates that in the event of losses, entrepreneurs can offset them either with profits from the previous year (loss transfer) or in subsequent years (loss carry forward). In this way, the entrepreneur is granted a tax relief in situations where the company writes losses instead of profits.

Due to the effects of the corona pandemic, many companies in Germany are now facing precisely this situation. Therefore, in its stimulus package to avert the economic consequences of the pandemic, the government coalition has decided, among other things, to extend the regulation on the use of losses. In our article, we explain all the details of both loss transfer and loss carry forward and illustrate them using an easy-to-understand example.

In this example, we calculate the tax benefits of a fictitious entrepreneur whose company generated a profit of EUR 10 million in 2019. In the following year, however, the entrepreneur also recorded a loss of EUR 10 million. We are well aware that these amounts are chosen to be very high, but only from this level the calculation of the loss transfer and the loss carry forward makes sense in an interesting example. Furthermore, we want to simplify the assumption that the entrepreneur is single. Of course, we also deal with the case of a co-investment of spouses. So much is already betrayed: the calculation remains simple in both cases.

2nd loss transfer: framework conditions and calculation

Before we dedicate ourselves to the concrete calculation of an exemplary loss transfer, we want to discuss the framework conditions for loss transfer in the previous form and in the new form adopted by the Grand Coalition.

2.1 Previous loss-refund scheme

2.1.1. Maximum amount of loss transfer

Until now, tax law provided for a loss reimbursement of a maximum of EUR 1 million for individual investments and EUR 2 million for joint investments. Couples living in married or marriage-equal partnerships could thus estimate losses at twice the amount of the loss repayment. The distribution of the loss amount between the partners is irrelevant. For example, one partner could declare EUR 1.5 million and the other EUR 0.5 million as losses without this having any impact on the calculation of their taxes.

2.1.2. The amount to be reported in this column shall be reported.

The second point concerns the period during which a loss transfer can be used. This is limited to the previous year of the current investment period. So if you make losses in 2020, you can only offset them with profits from 2019. Profits from previous years are irrelevant.

2.1.3. What happens to remaining losses?

So if a loss occurs that can only be partially offset against the previous year’s profit, what about the remaining loss? Well, the answer to that question is simple: he remains! More precisely, it forms the basis of what is understood by the term loss carry forward. But more on that later.

2.2. The new loss-refund scheme

New is basically only one aspect, because the amount of loss that can be carried back to the previous year is now five times higher than before. Thus, in the case of individual investments, EUR 5 million per year and EUR 10 million in the case of combined investments can be offset against profits from the previous year. However, this new regulation will only apply for the years 2020 and 2021.

2.3. Calculation example of loss transfer

So now we have a profit of 10 million EUR for 2019, which has already been taxed. For the sake of simplification, we assume that taxes of 50% have been incurred. But in order to offset the loss from 2020 with the profit from 2019, you simply calculate the tax for 2019 again. Thus, we use the revised taxable profit as the difference between the 10 million EUR profit from 2019 and the allowed maximum of 5 million of the loss repatriation from 2020. With an equal tax rate of 50%, the tax for 2019 is now EUR 2.5 million. Since the entrepreneur has already paid EUR 5 million in taxes in 2019, he will receive a refund of the overpaid amount of EUR 2.5 million in 2020. So he gets half of the taxes paid back.

Nevertheless, he still has a loss of EUR 5 million from 2020. How he can use this loss to his advantage, we calculate in the following chapter on loss carry forward.

Right at the beginning the good news: In contrast to the loss carry-back, which can only refer to the previous year, the loss carry-forward is unlimited in time (§ 10d EStG). But what exactly is meant by loss carry forward?

3.1.1. What is the loss carry forward?

Well, this is very simple. The loss carry forward is the sum of all annual losses that have not yet been recognised in taxation and are therefore saved until the company makes a profit in a future year. The volume of losses is then offset against the profit in this assessment, so that the profit is significantly smaller and thus reduces the tax.

3.1.2. Minimum taxation on loss carry forward

However, there is one more detail to consider: the principle of minimum taxation. The purpose of this scheme is to ensure that companies can only recognise losses to a certain extent in order to reduce their profits. This ensures that companies can be taxed at least partially. In general, the minimum taxation rule is that losses of up to EUR 1 million can be offset directly with a profit. If there are still both losses and profits, only 60 % of the profit can be offset by losses, while the remaining 40 % are subject to taxation. Any remaining losses will then be carried forward into the future.

3.2. Calculation of loss carry forward

Now let’s get to the practical calculation in our example. The entrepreneur thus still has a loss carry-forward of EUR 5 million from 2020. In 2021, the economy recovers, so our entrepreneur is now happy about a small profit of 2 million EUR. When it comes to taxation, we initially reduce profit by EUR 1 million without restriction. The remaining EUR 1 million of the profit is then to be treated under the minimum taxation as follows: