A tax loss can be a valuable tool for your business, BUT only if you have the know-how.
According to Investopedia, the logic behind a tax loss is to reduce tax liability during a year where the income or profits are high if losses were experienced previously. The tax loss carry forward reduces the overall tax liability during the high-earning year by incorporating the earlier loss as a reduction to taxable income.
So how can your business benefit from a tax loss?
Here's one way you can use a tax loss to your businesses' advantage
You can bring forward the balance of a loss from a previous tax year and deduct it from the current year's trading income. This way, you'll decrease your tax payable and maximise your profit, explains the Practical Tax Loose Leaf Service.
Here's an example of how you can do this: Let's say during the 2012 tax year, Company ABC incurred a loss of R45 000. The following year was much better for Company ABC and it generated a profit of R50 000. Its 2013 tax calculation is:
2013: Profit for 2013: R50 000
Less: Assessed loss brought forward from 2012: R45 000
Taxable income: R5 000
Remember, you'll only qualify for a tax loss if you've been carrying on a trade and you must have earned an income during the year in which you traded.
It's as simple as that. Use this useful tool to shrink your tax bill when your business profits are down.