How to account for corporate tax reserves

It is vitally important to know how to account for tax reserves for Corporate Tax since it is one of the decisive taxes to achieve a reduction in the tax burden of a company.

We have always defended that to achieve good tax savings, adequate tax planning is necessary to improve a business’s final results.

Knowing the advantages offered by the Tax Agency is essential, so today, we are going to focus on reductions through levelling and capitalization in Corporate Tax.

Accounting for tax reserves

This is a point that you must take very seriously to avoid problems and take advantage of the advantages it offers. When a company or business applies reductions to the levelling reserve and the capitalization reserve, it must account for:

• Unavailable reserves
• Deferred taxes
• Advanced taxes

Remember always to apply the reductions you can to take advantage of the benefits offered by the Tax Agency. Many people are unaware of the tax savings possibilities the Treasury allows, so don’t let ignorance make you lose money and harm your company.

Leveling reserve

If your company is small, you can apply a reduction for levelling reserve of 10% of the tax base for the year to the tax base. However, for it to be accepted, it must be reversed in the following years with the following conditions:

• Negative tax base: the existing reserve is reversed up to the amount of the negative bases, but only if it occurs within the following five years.
• five years without negative tax base: if after those five years, no negative bases have been generated, the remaining amount must be paid immediately.

The deferred tax is because the reduction applied to the levelling reserve ends up being paid to the Treasury during the following five years.

Even if the tax is no longer paid now, it must be paid in the future. In addition, it must be reflected in your company’s accounting under that premise of payment in the future.

Capitalisation Reserve

If you apply the reduction for capitalization reserve, you do not have to reverse anything in the next years, but there are almost always cases outside the norm. Sometimes, you must reflect a tax effect in your accounting that will become evident in the following years.

• 10% reduction of the increase in equity during the year. With a limit of 10% of the previous taxable base for the year.
• If part of the reduction cannot be applied because the limit has been applied, the excess can be deducted in the following two years. This creates a tax credit favourable to the company that will be accounted for as an advance tax

To finish, you must consider the compatibility of the equalization reserve and the capitalization reserve in the Corporate Tax.

Compatible reserves in Corporate Tax

You should know that the two reserves for Corporate Tax are compatible and that the capitalization capitalization reserve must be applied first. To account for the deferred tax, you will have to link it to the equalization reserve.

In the case of the capitalization reserve, you must account for it as an advance tax, provided that it cannot be applied in full due to a lack of a base.