Tax treatment in a loss situation Follow

How does Business Plan Pro handle taxes in a situation where steady losses are encountered before beginning to make a profit?

Resolution

Business Plan Pro handles taxes as simple mathematics, multiplying your assumed tax rate times the pre-tax profit. If there's a loss for the year, then it sets the effective tax rate at zero. 

Simple Tax Assumption

The tax rate percentage in your General Assumptions table is a simple assumption. We could have made it more complex, with lookup functions for graduated tax rates, or automatically changing the treatment for loss situations. Still, this is about planning, not accounting, and simple is good. The estimated tax rate is easy to understand and easy to apply. You get a lot more planning power from a simple and obvious estimate than from a complex, hard-to-follow formula.

Exception to the Rule

If a company projects steady losses throughout their plan, a negative tax rate could occur, resulting in negative taxes. The problem is that the government doesn’t pay companies to lose money. Business Plan Pro has a tax "toggle" built into the Profit and Loss table to handle this.

  • If there is a loss in revenue for the year (creating a negative tax), the formula sets the toggle to "FALSE" and no tax is included.
  • If there is a profit for the year, the formula sets the toggle to "TRUE" and includes tax based on the tax rate in the General Assumptions table.

This toggle is located in the 'Include Negative Taxes' row at the bottom of the Profit and Loss table.

Include Negative Taxes

You can use the 'Include Negative Taxes' row in the Profit and Loss to override the normal treatment and count negative taxes when there is a loss. To count the negative taxes, type TRUE in the annual column (to replace the automatic FALSE toggle).

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Adjusting Future Taxes

If your plan includes early losses and making a profit later on, then you'll probably have a "loss carried forward" tax advantage that will reduce the tax rate when there are profits. This can be an educated guess for planning purposes. Take whatever your tax rate would have been and make it lower.

For those who want a more detailed example:

  1. Take the sum of the losses.(Example: $100K)
  2. Multiply the sum by your estimated tax rate (25%) when you make profits, and call that the loss carried forward.(Example: $100K * .25 = $25K)
  3. Subtract that amount ($25K) from the tax estimate of the first profitable year.(Example: if the tax estimate was $50K at 25% rate, $50K - $25K = $25K)
  4. Change your estimated tax rate in the profitable year so the estimated tax is now equal to the reduced amount.(Example: if estimated tax was $50K at 25%, and your target tax is $25K, then make your tax rate 12.5% for that first profitable year)
  5. Explain the adjustment in text accompanying the General Assumptions table. The explanation can be this simple:
  6. "Taxes are set at zero during the loss periods. The loss carried forward impact reduces the estimated tax rate during the profitable periods."
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