Starting a company is always associated with financial challenges. Especially at the beginning, losses are not uncommon, as the income is often not enough to cover the expenses. However, it is important to make optimum use of these losses for tax purposes. In this blog article, we take a look at the tax aspects of losses when starting a business and show how entrepreneurs can deal with these losses in order to be successful in the long term – even under the risk of possible bankruptcy.

1st Tax Treatment of Losses at Company Formation

When starting a company, it is not uncommon for the first years to be characterized by losses. However, these losses may constitute a tax relief. According to § 10d EStG, losses from start-up activities can be offset against future profits. This takes place via the so-called loss carry forward or loss return transfer.

1.1. Loss carry forward according to § 10d EStG

Companies that make losses in the first year of their establishment have the opportunity to carry those losses forward into the following years. This means that they can offset them with profits in the coming years, which reduces the tax burden. A loss carry forward is particularly advantageous if the company moves into a profit zone in the long term.

1.2. loss reimbursement according to § 10d EStG

The loss repayment offers another possibility: losses can be offset retroactively with the profits of the previous year. This leads to a tax refund, which may give the founder financial relief as early as the first year.

2. significance of losses on company formation for tax planning

The tax treatment of losses on company formation is an important element of tax planning. Founders should check early on how they can use their losses tax optimally. This can be done through a forward-looking planning of income and expenses in order to maximize any tax benefits. Especially for founders who expect high investment costs and low income in the first few years, tax relief through losses is crucial.

A company that makes losses can still benefit from tax incentives generated by investments. For example, companies can claim investment deduction amounts according to § 7g EStG. Research and development can also receive tax benefits, so that founders receive tax incentives despite losses.

3rd use of losses in restructuring

In the case of a restructuring, for example by conversion of a company, losses can in principle be “taken away” – under certain conditions. The conversion tax law (UmwStG) allows tax-neutral conversion so that losses can be transferred to the new legal form. The prerequisite is that the economic operation is essentially maintained and no significant changes in the operating assets take place.

However, losses are lost if the restructuring is considered not to be tax-recognised or abusive, for example in the case of a hidden contribution or a transaction in which the company is not economically viable.

In order to make optimum use of losses after restructuring, early tax advice is crucial. In this way, founders can ensure that losses are not lost in the conversion and are taken into account in the best possible way for tax purposes. Careful planning helps to minimize the tax burden in the long term and to avoid the risk of subsequent tax recovery.

Risk Insolvency: What Entrepreneurs Should Consider When Losing

Losses on company formation are often accompanied by an increased risk of insolvency. Especially in the first few years, it can be difficult to achieve profitability, so that insolvency threatens. It is therefore important to be prepared for the risks both fiscally and financially. Business owners should establish good risk management and regularly consult with a tax advisor to reconcile tax loss use and bankruptcy risks.

In the event of insolvency, losses are not always readily usable. Tax loss recovery can be restricted if the company goes bankrupt. For example, there are special rules for offsetting losses in the event of insolvency. In such cases, entrepreneurs must ensure that the losses are properly determined and, if necessary, tax losses from the insolvency period can also be used for the future.

Losses on company formation – Conclusion

Losses on company formation are an inevitable part of entrepreneurship and represent a particular challenge. At the same time, however, they also offer tax design possibilities that founders should use to minimize their tax burden in the first few years. With a wise loss carry forward or loss carryback, the founders can benefit from tax advantages.

However, the risk of insolvency should never be ignored. Entrepreneurs must be aware that losses are also associated with increased financial risk and take appropriate preventive measures. Professional risk management and timely tax advice are therefore essential in order to make optimum use of losses and minimize the risk of insolvency.