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Tax Reduction: Record Your Unpaid Debts as Accounts Payable

This article was written by HeiKin Wong

Running a successful business requires various expenses. From employee salaries to rent to advertising costs, many services would require business owners to accrue liabilities in the process. While these liabilities might not be paid before the fiscal year closing date, they can still be counted as expenses in the current fiscal year. In this article, we will walk you through how to record your unpaid liabilities in the current fiscal year to reduce taxes.

If you wish to know more about the techniques of reducing corporate and self-proprietor taxes, then visit our business owner resource page to see more articles on how you could pay fewer taxes this year.

Disclaimer: Please note the information provided on this website does not and is not intended to constitute legal advice. All the information, content, and materials available on this site are for general informational purposes only and you agree to not hold us liable for any damages incurred based on the following information. As always, consult your tax accountant before implementing any tax reduction measures.

Navigating Unpaid Debts and Accounts Payable for Tax Benefits?

Tapping into the potential of recording unpaid debts as accounts payable can be a game-changer for tax benefits in Japan. But let’s be honest, it’s not always straightforward. That’s where a seasoned accountant comes into play. They can help you navigate the twists and turns, ensuring you get the most out of this strategy. Dive deeper and see how an expert can make all the difference in our Ultimate Guide to an Accountant in Japan.

What is 未払金 and 未払費用?

未払金 is accounts payable and 未払費用 is accrued expensesWhile many may be familiar with both concepts, we will still explain this as a refresher. Both accounts payable and accrued expenses are the money that a business owes to its suppliers and vendors. Accounts payable are short-term, accurate, and measurable expenses that already have invoices issued from the vendors. These can be things like office supplies and one-time equipment purchases like computers. Accrued expenses are usually continuous debts you will have to pay for and don’t have an accurate number or invoice yet.

For example, water and gas are something that you will have to pay for every month. You have received these services this month but the bill won’t arrive till next month. However, from the bills of previous months, you can make an estimate/calculation on how much you will be paying and record it as accrued expenses in accounting.

While there are differences between 未払金 and 未払費用, they both work the same in the context of tax reduction. Both accounts payable 未払金 and accrued expenses未払費用 are recorded as expenses in accounting. Therefore, if you record all your unpaid expenses as accounts payable and accrued expenses, you can reduce the profit for the current fiscal year. Here’s an article on 未払金 accounts payable and 未払費用 accrued expenses (in Japanese) if you wish to learn more about the difference between these terms.

What are the requirements for debts to be counted as 未払金 accounts payable or 未払費用 accrued expenses?

There are three requirements for accounts payable and accrued expenses to be counted as expenses in the current fiscal year. A debt will need to satisfy all three to be counted either as accounts payable or accrued expenses. These requirements are as follows: 

  • Business must have received the service and payment obligation has been established before the fiscal year account closing date (決算日); 
  • Have a contract that outlines the payment obligations before the account closing date; 
  • The amount of debt can be calculated before the account closing date. 

For claiming future expenses in the current year, see our article in English on short-term prepaid expenses to see how you could use it to further reduce taxes.

Important points to remember when using 未払金 accounts payable and 未払費用 accrued expenses to reduce taxes

It should be noted that this tax reduction technique usually does not reduce the absolute amount of tax you have to pay, but simply delays the time you will have to pay for the said tax. This means that your tax amount for next year will go back up as a result of moving these expenses to this year. If you expect the profits for next year might be higher than the current fiscal year, then leaving these expenses as next year’s expense might be the better option. 

So why actually use this method for tax reduction?

Glad you asked, using accounts payable and accrued expenses may prevent your business from going over a certain tax bracket. For example, if you estimate your net profit this year might go over the 8 million yen bracket, then you might want to add expenses that will be paid in the next fiscal year to the current year. This will prevent your net profit from going over that 8 million yen limit and help reduce corporate taxes.

How does recording 未払金 accounts payable and 未払費用 accrued expenses work in practice?

For salaries, say you pay your employees 3 million Yen per month with the salary cutoff period at the 15th. That means even if you haven’t paid a portion of salaries between 16 and the end of the month, it can still be counted as accrued expenses and recorded as an expense in accounting. In this case, the tax-saving effect will be half of the month’s salary, which is 1.5 million yen. The case is similar for social insurance premiums. The money deducted this month is actually the premiums for the previous month. Therefore, if your company closes its book in September, the social insurance premiums that fall at the end of October can be recorded as accrued expenses and help you reduce your profit. This effect is more significant when you have a lot of employees, where you can record a surprisingly large amount of expenses.

Another common practice where accounts payable is usually implemented is supplies expenses. For example, if you have purchased/ordered things like equipment from a supplier  before the book closing date, it can be counted as expenses even if the actual payment is made in the new fiscal year.

Interestingly, under certain conditions end-term bonus (which we have written about in English here) could also be recorded as accounts payable. Given that you have met a set of requirements (article in Japanese), you can pay out the end-term bonus in the next month while having them recorded as accounts payable for this fiscal year. Finally, since things like utility and communication costs will be paid in the next month, it naturally falls under accrued expenses and can be recorded as this year’s expenses.

Videos on recording 未払金 accounts payable and 未払費用 accrued expenses in current fiscal year

From 公認会計士たぬ吉の簿記会計塾

From 【簿記系YouTuber?】ふくしままさゆき

Concluding Thoughts

Having unpaid debts recorded as accounts payable and accrued expenses is a popular tax reduction technique amongst Japanese business owners. When used properly, this technique can have a significant tax-saving effect on your company. It is highly recommended that you find a tax accountant to make a business plan to make the most out of this tax-saving technique next year. 

Besides reducing corporate taxes, there are other measures you can take to maximize profit for your business. Check out our article on the RACI matrix to see how to create a successful business system. 

Disclaimer: Please note the information provided on this website does not and is not intended to constitute legal advice. All the information, content, and materials available on this site are for general informational purposes only and you agree to not hold us liable for any damages incurred based on the following information. As always, consult your tax accountant before implementing any tax reduction measures.

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