Losses

Basic Options

Losses can be used as follows

• losses carried forward from  an earlier  periods
• current year losses
• losses carried back to the preceding corresponding period
• losses  carried forward against future income

Losses on trades carried out wholly abroad only may only be offset against future profits of the same trade . However, such  losses may be offset against other foreign income .

There are special rules in relation to losses arising from other categories of income . Losses in relation to property business may only be set against income from properties and carried back to a period of one year and then forward ..

Certain capital allowances  may be deducted against all profits of the current accounting period, profits of the previous accounting period and carried forward against property income.

The claim to set off  loss against all income in  the tax year must be specifically made within two years . Losses must be claimed against all income, It is not enough to claim part of the loss and leave the balance of income covered by tax credits, allowances and shelters etc .

Capital allowances increase a loss. Capital allowances net of  balancing charges are available to increase a loss.

Losses do not apply to losses on foreign trade. They are available only against the profits of that  trade.

Losses are  carried forward automatically. The  choice has to be made to claim it in the current year. The  time limit for making a claim in the current year is two years.

Calculation of Losses

Losses are calculated in the same way as profits. They are generally based on the accounts of the accounting period ending in the tax year. The actual basis applies in the first three years (when the commencement rules apply) and the last two years of trade(penultimate year and year of cessation).

When there are losses, as calculated under the adjusted accounts, there are  usually options as to how they may be used. The taxpayer may  opt to set the loss against other income in the year concerned. This option must be exercised within two years.

Where this income does not offset the losses it is set against income of the spouse where they are jointly assessed. This follows automatically from the exercise of the option.

The  strict rules applies at the first two years and the last year. The  taxpayer can choose to have losses assessed as the actual loss of the year rather than the loss for the basis period ending in the year. Losses are used to reduce earned income of the individual then unearned income, then earned  income of  the spouse and finally unearned income of the spouse.

Where  losses straddle a number of accounting periods, the loss in the last 12 months as a whole is used.  If there is loss in either accounting period within the 12 months, it is allowed.

USC & PRSI

Losses are deductible from income but not all offset PRSI and USC. PRSI and USC are not reduced by the option to offset losses against total profits. Losses brought forward from the same trade in previous years may reduce liability for USC but not PRSI.

Capital allowances brought forward may reduce both USC and PRSI where they are  set off against current years ‘profits from trading.

Use of Losses

Loss relief is not compulsory and is a matter for the taxpayer to elect the position. The loss may be set against total profits of the year. The  taxpayer can opt to set off the remaining loss against their total profits of the preceding year. Any remaining or unused losses can be brought forward against the profits of the same trade.

Losses are available firstly in the tax year to  reduce other taxable profits / income to zero. Losses can be offset against all other income for the year concerned before tax credits.

A taxpayer may not use a combination of credits and partial use of  losses. The losses must be used to reduce the other income to zero.

Losses which are not set off against total profits of the year may be carried forward against future profits of the same trade. These may be set against all losses or the residue of losses if they exceed the other current year income.

The taxpayer may choose to increase the current year losses or turn a profit into loss by the amount of capital allowances in the year.

A loss which is not used in the current year brought back one year may be carried forward to be set against future trading income of the same trade.

Pre-Trading

A deduction may be claimed for pre trading losses which are incurred within three years before commencement of the trade, for the purpose of the trade where they are not otherwise allowable in relation to any other profits of the trade

The actual loss must be claimed in the first three years. In in the year of cessation  loss is claimed on the basis of the actual loss in the period to cessation. Where the concession by which a trade may be assumed by the widow of the deceased taxpayer, is used terminal relief may not be claimed.

Terminal Relief

So-called terminal relief applies to losses and capital allowances attributable to the last 12 months of trading. These losses may be carried back against income of the trade in the three years prior to cessation. The trade or profession must have permanently ceased.

If the person is engaged in the trade or profession both  before and after  discontinuance, relief is not available. The-amount of terminal loss is profits less capital allowances for  those year less charges and losses deducted in arriving at the total profits for those years. Terminal loss is allowable firstly against the later year.

Terminal loss calculated by reference to losses in the 12 month period (taking account of the two accounting periods) plus capital allowances.

Terminal loss relief for companies is broadly similar to that for sole traders. Losses falling in the last 12 months may be set against income in the preceding thirty six months from the  trade.

Charges

Certain items are treated as charges rather than deductions. They include pension contributions royalty payments and certain loans. See the separate sections on charges.

Excess charges are similar to losses for many purposes. The may be carried forward or be the subject of  terminal loss relief. However, they cannot be set against non-trading income.

Certain charges are treated as creating  losses for this purpose, provided they are wholly for the purpose of the business.  This includes annual payments .

Election

Relief for losses must be claimed. Tactical considerations arise in relation to whether or not and when to make a claim for loss relieved. If trading  losses are carried forward, they must be used against income of  the same trade. They must be used against the first available profits

Losses may be set against current year income. This means total income and not just income from the trade . This may reduce income that may be otherwise be taxed  at the top rate. The full loss must be used against income. It is not possible to use losses in part and use allowances and credits to eliminate tax.

The  election must be made within two years. If the income is less than the loss, the excess may be carried forward against the next profits of the same trade .

Capital allowances

A loss can  be augmented by capital allowances Capital allowances brought forward cannot be used to make or create a loss However they can reduce profits and offset balancing charges.

Some classes of capital allowances are restricted and are subject to the higher earners restriction. These are capital allowances arising from the former investment incentive schemes and the measures limit the extent to which the allowances may be used.

Capital allowances deriving from the development of holiday cottages (other than with certain exceptions) may be set off only against profits from those holiday cottages. A similar restriction applies to hotels other than in the Border,  Midland and Western counties which are subject to a more liberal state aid regime.

Allowances deriving from industrial buildings and commercial properties under property based incentive schemes are limited to a maximum  offset of €31,750 against other income for the taxpayer who is not an active partner. The restrictions do not apply where the allowances are subject to the USC property relief surcharge.

Passive investors are those

• who do not work at least 10 hours a week in the trade or profession (other than in circumstances of illness or maternity leave)
• where the trade is carried on a commercial basis and profits can reasonably be expected in the future

Anti-avoidance provisions seek to ensure that taxpayers cannot artificially avoid the passive income restrictions where there is no genuine trade being undertaken.

Carry Forward

Losses can be carried forward until they are exhausted.  Losses can only be brought against profits of the same trade . They must be used before current year capital allowances.

When the trade ceases permanently, the losses are no longer available. However they may be offset against post cessation receipts under certain circumstances.

Losses on a foreign trade can only be carried forward against the trade concerned

Capital Allowances

Capital losses cannot be offset against income. Capital losses may  be set against capital gains of the current year other than development land gains and carried forward against future capital gains .

Reorganisation and Sale

Trades may transfer from one company to another in the context of a reorganisation   Normally this would mean that  losses would not be available to be carried forward. However provided the companies are under common control, the trades may  be deemed not to ceased, and the successor may be allowed to step into the shoes of the predecessor .

Where there is a change in ownership and a major change in the nature  of the trade or its scale has become small or inconsiderable within a three-year period, losses are not allowed .The purpose is to prevent artificial groupings of companies with losses.. A major change could include changes in the customers and markets.

Foreign Trade

Losses on foreign trades can only be carried for against the future profits of the same trade . This applies only to a trade which is wholly conducted abroad . If the trade is in fact, the overseas trade of the Irish company, than this restriction does not apply .

Hobby Farming

Losses from hobby farming or market gardening are not allowed against total income. It must be shown that  the trade is conducted on a commercial basis for losses to be allowed.

If losses occur in  four successive periods they may be carried forward against the future profits of the trade only,  unless it can be shown that the business  could not reasonably be expected to become profitable until after four years of losses

Losses are computed in the same way as profits. The same basis period is used. Losses are adjusted in the same way as profits.

Charges

Charges are sums such as interest or patent royalties, which are sums  for which the recipient has no ongoing expenses. They are “pure income” in the hands of the recipient.. They are treated differently to expenses on the part of payer. They are deducted as a charge on total profits.  They are not deducted  from the particular   income with  which they are associated. Relief is given on the basis of charges actually paid rather than on an accrual  rules basis.

There is no relief for excess non-trade charges.  Excess trade charges be used in the same way as losses.  They can be carried forward against future profits of the trade. Excess trade charges may be used in the same way as losses. Excess charges cannot be carried back to the previous period.  However, they can be carried forward.

Capital Losses

Capital losses cannot be offset against income. Capital losses may  be set against capital gains of the current year other than development land gains and carried forward against future capital gains .

Development Land

Development land  losses can only be set off against development land gains.

Restriction for Late Filing

Claims to losses, excess capital allowances are restricted if the tax return is made late.

There is a  50% restriction if the returns is two months late, to a maximum of €158,715.Where the return is late but  within two months, there is a  25% restriction up to a maximum of €31,740