Tax Reduction: The Loss Carryforward Deduction

This article was written by HeiKin Wong.

The pandemic has put countless businesses in Japan in a financially difficult situation. This means that it is even more crucial for business owners to know more about the various methods that could reduce taxes from their companies. In this blog, we will discuss the loss carryforward deduction (欠損金の繰越控除) kessonkin no kurikoshikujyo (article in Japanese) and how it can ease tax pressure on your company in these trying times.

This is a continuing series of blogs about Japanese Tax Tips, visit our main page to learn more about tax reduction and useful tips for your business in Japan.

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.

Seeking Expertise on Japanese Tax Deductions?

While the loss carryforward deduction offers a strategic avenue to alleviate corporate tax burdens, especially for small to medium businesses, navigating its intricacies requires a deep understanding of Japan’s tax landscape. An accountant can be your guiding light, ensuring you maximize these benefits while staying compliant. For a holistic approach to managing your finances and understanding the role of accountants in Japan, delve into our Ultimate Guide to an Accountant in Japan.

Let us help you 2x-5x your business in Japan

We can help you scale your company in Japan and internationally through one on one and group coaching, online courses, and a marketing agency service.

SEE OUR CASE STUDIES

What is 欠損金?

To explain the concept of loss carryforward deduction, we must first discuss the concept of 欠損金 kessonkin. In simple terms, it is the loss accumulated when calculating corporate tax. If you have made a net loss in a financial year, then you have accumulated 欠損金.

What is 欠損金の繰越控除?

This is basically a system where you could deduct your future income with current loss in order to level the corporate tax burden in each business year. The tax deduction can be traced back 10 years before the start of the current business year. It is possible to deduct 100% of last year’s loss when calculating corporate tax for the current financial year. Let’s use a hypothetical business (business A) to explain this concept:

Business A financial situation for three business years:

In the example above, business A has made a net loss in both the 2017 and 2018 business years. These losses will be carried to the calculation of the subsequent business years for up to 10 years. Fortunately, business A has made a good profit in the 2019 business years.

However, because of the loss accumulated in the previous years business A might find paying corporate tax for a 400 million net profit business year to be difficult. This is where 繰越控除 comes into play. Business A could deduct the loss of previous business years when calculating the profit for the current business year, meaning the actual net profit that business A can use when calculating the corporate tax is (400 – 200 – 50 million = 150 million Yen). Evidently, such calculations can help alleviate the financial pressure from a poorly performing business when it just starts to make back its money.

Business Owner Tip: The ten-year loss carry over limit are for those whose businesses are incorporated. For self-employed business owners (article in Japanese) , you can carry over losses for a maximum of 3 years as long as if you have filed the blue application tax forms.

A Crucial Benefit of the Loss Carryforward Deduction System

It is important to note that this system is not a single-use system, as the loss a business has made in a single year can be carried forward into each subsequent year until the losses are fully deducted. For example, say business A above did not make 400 million profit in 2019. Instead, it made a small 50 million Yen Profit that year. That means it would still have a 200 million loss that can be carried forward into the corporate tax calculation for the 2020 business year.

For more information on how the calculation is done, check out this article (in Japanese) to learn more.

How is loss carryforward deduction useful for Japanese businesses?

This system could drastically impact the amount of corporate tax you pay for each business year when you have made a loss in any business year for up to 10 years. 

In the example above, business A would have paid 160 million in tax if it did not use the 繰越控除 system. Instead, it now pays 60 million in tax (assuming the effective corporate tax rate of 40%). The 繰越控除 is particularly useful for medium and small Japanese businesses. This is because a net loss in income impacts their financial situation much more than large business. The pandemic has put a substantial burden on the financial situation for small businesses and this system could reduce their tax burden in future business years.

Important things to note when using    繰越控除

The system does not just happen on its own. There are three prior conditionals for a business to be eligible for 繰越控除. First, business owners will need to apply for a special declaration called the declaration. There are numerous merits (article in Japanese) to applying for a blue declaration (it’s actually a light green paper if you are looking for it in the tax office) but that’s a topic for another time. Second, the loss carryforward (欠損金) also has to be declared in each subsequent business year.

Finally, you would also need to keep the account books and details for your previous business years. Another point to keep in mind is the amount of loss that can be carried forward depends on the size of the company. For small and medium businesses whose capital is under 100 million Yen, they would get the full amount of loss carryforward; For larger businesses that have a capital of over a billion Yen, the amount they can carry forward is limited.

There are also risks to the overuse of the carryforward deduction system, adding unnecessary costs to boost your net loss in a continuous manner would increase the chance of being investigated by the government. Having a long-standing record / large amount of 欠損金 could also impact a business’s ability to acquire new funding from financial institutions, therefore business owners should avoid exploiting this system for financial advantages.

Video guide on 欠損金の繰越控除

Since the loss carryforward deduction is such an important part of small and medium Japanese businesses, many business-related YouTube channels have made videos on this topic. Here are two videos that explain how a business could use this system to their benefits. 

From 社長の資産防衛チャンネル

From 濱田会計事務所のちょっとお得な税金の豆知識

If you are interested in more Japanese business channels, then check out our article on the Top 10 Japanese Business Youtube Channels to learn more.

Concluding Thoughts

Carrying loss in prior business years can be a great way to reduce your corporate taxes. This is especially the case when small to medium businesses in Japan are struggling to stay afloat. There are other ways that a business owner could take to ensure the success of the business. Check out our article on the RACI matrix to see how a good responsibility assigning system could lead to a successful business.