Please consult a licensed tax attorney in Japan or the website of the Japanese tax authorities (the NTA) to get the most up to date and accurate information on short-term prepaid expenses. Now with that said, let’s dive in.
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Short-term prepaid expenses in Japan
One possible way to reduce your corporate tax burden is to utilize the short-term pre-paid expense exception 短期前払費用の特例. This exception allows you to pay for one’s year worth of a common monthly recurring expenses like rent and server costs and deduct the total amount in your current fiscal year. Here is the link to the official government tax page for short-term pre-paid expenses exception in Japan.
When calculating expenses, you count the expense at the time of receiving the service or benefit. However, using this exception, you can count the pre-paid yearly expense amount as a deductible, as long as you receive the service within 1 year of making the payment.
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Two Japanese words, an important distinction.
「前払費用」VS「前渡金（前払金）There is an important difference between these two Japanese words. The second 前渡金 zentoukin refers to making a payment in advance for a product or a service that you will use temporarily – this can include things like purchasing materials for producing something and other bulk purchases. The first 前払費用 maebaraikin refers to something you pay for in advance and will continuously use – the short-term prepaid expense exclusion only applies to 前払費用 maebaraikin .
Conditions for the Exception
- The service has to be one you use continuously during the duration of the entire contract period.
- The service has to be priced at the actual value of the service – my assumption is that the price you pay has to be a normal price and not an inflate done.
- The payment has been completed during the current fiscal period.
- You have to treat the same expense the same way in the following fiscal periods.
Areas where you can apply the pre-paid expense exception are as follows
- land rent
- office rent
- leases : my assumption is something like a copy machine or computer
- health insurance costs
- payment of interest in a loan
According this article in Japanese from a tax accountant, you cannot claim monthly accountant fees and similar fees using the exception. You also cannot claim some promotional costs that you pay for on a monthly basis.
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Navigating Japanese Tax Nuances?
Grasping the concept of short-term pre-paid expenses is just one facet of Japan’s multifaceted tax landscape. To ensure you’re maximizing your tax benefits and staying compliant, consider seeking expertise. Dive deeper and discover the advantages of partnering with a seasoned accountant in Japan through our Ultimate Guide to an Accountant in Japan.
