Explanation to the tax office for losses: sample for the simplified tax system

Enterprises that have submitted a profit and loss statement to the tax service with a loss may receive a notification requesting an explanation of the reasons for its formation. Otherwise, if the taxpayer fails to provide the necessary information, the tax inspectorate may decide to conduct an on-site audit or, in extreme cases, liquidate the legal entity. It is not recommended to ignore such a “sign of attention”. This article will discuss in detail how to write explanations to the tax office regarding losses. A sample will be given at the end of the article.

How to behave?

and it’s no secret that not a single chief accountant wants his company to be included in the list of “lucky ones” for conducting on-site events to audit financial and economic activities by tax authorities. But what should he do if the annual report turns out to be a loss, and the tax inspectorate demands to explain the reasons for its occurrence?

In this situation, there are two options for behavior:

leave the annual report as is, but at the same time you need to competently and convincingly write explanations for the company’s losses;
artificially correct reporting in such a way that unprofitability ultimately “disappears.”

Having chosen one option or another, you must understand what tax risks you can expect and what consequences they can bring for the company.

If you have at your disposal all the properly completed documentation that can confirm the validity of the expenses incurred, then there is no need to artificially adjust the reporting, i.e., there is no need to remove the company’s losses, since they will be lost to you forever. In such a situation, it would be more appropriate if you prepare an explanation for the losses to the tax office. We will consider a sample of such an explanatory note below.

But sometimes it is not possible to explain the reasons for the occurrence of a negative balance. Then you can correctly correct the profit and loss statement and thereby hide the loss. But you must understand that deliberate distortion of reporting may result in fines for the company. It would be better if, before submitting your reports to the tax office, you look at them again to see if you have taken into account all the income.

How to write an explanation of losses?

What criteria are used to consider companies that have shown a loss?

Typically, there are three types of losses:

a fairly large loss;
the loss is repeated over two tax periods;
the loss was shown last year and in the interim quarters of the current year.

What should newly registered enterprises do? Loss is a common occurrence for new businesses. In addition, tax legislation requires accounting for expenses in the period in which they are incurred, despite the fact that income has not yet been received. If a company was created and suffered a loss during the same year, then the tax authorities most likely will not consider it as problematic.

However, if you show a loss for more than one year, the inspectorate will require you to explain the reasons for this situation, since it may consider that you are deliberately reducing profits. Therefore, we recommend that if you have a loss, submit a balance sheet and profit and loss statement with an explanatory note, this will allow you to avoid unnecessary questions.

What indicators do tax authorities pay attention to when auditing an unprofitable company?

On the ratio of debt and equity capital. It is considered acceptable if the amount of equity capital is greater than borrowed capital. In this case, it will be better if the growth rate of borrowed capital is lower.
On the growth rate of current assets. It is considered normal if this indicator is greater than the growth rate of non-current assets.
On the growth rate of accounts receivable and accounts payable. These indicators should be almost the same. Tax officials may be interested in the reason for the increase or decrease in these indicators.

What should an explanatory note about losses look like?

How to write an explanation to the tax office? There is no standard form as such; explanations are written in free form on the official letterhead of the enterprise and signed by the manager. The note is drawn up in the name of the head of the tax office, which sent a request for clarification of losses.

The main emphasis in the letter should be on explaining the reasons for the negative financial result. Here it is very important to back up all words with facts that influenced the emergence of a situation where the enterprise’s expenses exceeded its income. It is very good if the company has documents that can be used to confirm that this is normal business activity aimed at making a profit, and there will be no losses in the next reporting period. To prove that you have taken a number of steps to achieve positive results, you can attach a copy of the business plan, a breakdown of accounts payable and other similar tools to the explanatory note.

Explanations to the tax office regarding losses in the income tax return

In the explanations to the income tax return, it is better to provide real data on exactly what factors influenced the negative financial result, attaching supporting documents. These can be tax accounting registers and account balance sheets, contracts, documents for the purchase of expensive equipment, etc.

An example of an explanation of losses in an income tax return for a newly created organization

To your request No. 501 dated February 13, 2017. on the provision of explanations on the income tax return for the reporting period, we inform you that the amount of the loss received was caused by the lack of necessary revenue, as well as significant costs associated with opening it was registered in the 4th quarter of 2021. and did not have time to develop a sufficient client base. At the same time, significant costs were incurred for the purchase and installation of equipment necessary for the production of products, renovation of the premises, and the acquisition of vehicles necessary to start the operation of the enterprise. All fixed assets were put into operation using bonus depreciation in accordance with the accounting policy. Significant amounts of money were spent on the advertising campaign.

According to the developed business plan, a positive financial result should be achieved by the end of the 4th quarter of 2021. To date, the advertising campaign has already yielded positive results and ALFA LLC has entered into 2 large supply agreements totaling more than 12 million rubles.

Application:

Tax accounting register - Income from the sale of goods, works, services for the reporting period;
Tax accounting register – Direct expenses for the sale of goods, works, services for the reporting period;
Tax accounting register - Indirect sales costs for the reporting period;
Supply Agreement No. 35 dated December 12, 2016. with Perspektiva LLC;
Supply Agreement No. 42 dated December 28, 2016. with BRUCE LLC.

An example of an explanation of the reasons for reflecting losses in the income tax return of an organization that has been on the market for more than two years

To your request No. 605 dated February 26, 2017. On providing clarifications on the income tax return for the reporting period, we inform you that the amount of loss received was caused by a drop in demand for the company's products during the winter period. The main activity of STROYPROEKT LLC is the wholesale sale of building materials. During the winter period, our customers are inactive; high competition in the market forced STROYPROEKT LLC to make additional discounts to customers during the reporting period, thereby complicating the process of making a profit. At the same time, the company still had monthly expenses for labor, insurance premiums, rent of premises, communication services, electricity, and maintenance of vehicles. From April 2021 The company expects an increase in demand for products due to the onset of the season.

Application:

Tax accounting register - Income from the sale of goods, works, services for the reporting period;
Tax accounting register – Direct expenses for the sale of goods, works, services for the reporting period;
Tax accounting register - Indirect sales costs for the reporting period.

Explanation 1. Reduction in prices for goods, works and services sold

The reasons for this decrease may be the following factors.

1. The selling price is reduced due to a decrease in market prices or a decline in demand. The consumer will not buy a product with a price higher than the market price, and by selling it at a loss, you can get at least some revenue and not go into an even greater loss. This explanation can be supported by the following documents:

by order of the manager on the establishment of new prices and the reasons for such changes;
a report from the marketing department, which will reflect the market situation and provide an analysis of the decline in demand for goods shipped by the enterprise.

2. Product expiration date expires. To prove this reason, you can attach the following documents:

act of the inventory commission;
an order from the manager to reduce prices for goods.

3. Buyer's refusal to order. You can justify this reason by attaching an agreement to terminate the contract or an official letter from the buyer in which he writes about his refusal.

4. Seasonal nature of goods, works and services sold. Seasonal fluctuations in demand are typical for such areas as construction, tourism, etc. To justify this reason, you will also need an order from the manager to reduce prices.

5. The price reduction is explained by the development of a new sales market. At the same time, your arsenal should include marketing research, plans, and development strategies. It will not be superfluous if you provide copies of supply contracts to new points of sale or documents for opening a new division in another region.

Loss on income tax return

Every accountant, reflecting a loss on line 100 of sheet 02 of the income tax return, must understand that he cannot avoid the requirement to provide explanations from the Federal Tax Service. After all, the tax inspectorate is interested in increasing tax revenues to the budget and wants to check whether the taxpayer is underestimating the tax base.

It will not be difficult for newly registered companies to provide explanations, but companies that have been on the market for more than two years will have to carefully analyze the reasons for the loss.

The main reasons for the loss may be:

Reducing prices for products in order to increase their competitiveness;
Reconstruction of production premises;
Equipment modernization;
Expensive repairs;
Loss of a major client (termination of a contract with a major buyer);
Application of bonus depreciation;
Increased costs for the purchase of imported materials due to the rise in the dollar exchange rate;
Falling demand for products during the financial crisis in the country;
Increase in rent for premises, warehouse;
Credit load;
Seasonality of the work performed;
Mastering new types of activities;
An increase in the share of overdue receivables and, as a consequence, the creation of a reserve for doubtful debts.

Sample explanatory note

For a clear understanding of how to write explanations to the tax office regarding losses, the sample presented below will help us.

To the boss

Inspectorate of the Federal Tax Service of Russia No. 6

in Kazan

Skvortsov A.S.

EXPLANATIONS

Having studied your request regarding the provision of explanations explaining the formation of the loss, Romashka LLC reports the following.

During nine months of 2014, the revenue of Romashka LLC from the sale of products amounted to 465 thousand rubles.

Costs taken into account in tax accounting amounted to 665 thousand rubles, including:

material costs – 265 thousand rubles.
labor costs – 200 thousand rubles.
other expenses – 200 thousand rubles.

Compared to the same period last year, these costs increased by 15 percent, including:

material costs – by 10%;
labor costs – by 4%;
other expenses – by 1%.

From these indicators it is clear that the increase in the company’s expenses was mainly associated with an increase in prices for materials and raw materials necessary for the production of our products. In addition, it is worth noting that the company, in order to motivate its employees, increased wage costs.

Also, due to the market situation and the level of competition, the Company was unable to implement the planned increase in prices for the goods sold.

In connection with the above, it can be argued that the loss is a consequence of objective reasons.

Next, you can include a description of the further development of the enterprise in the explanations for tax losses. An example of such a description:

Currently, the management of the enterprise is already conducting negotiations, the purpose of which is to attract new buyers and customers, and is also considering the issue of improving the products, which will increase the income of the enterprise several times. The company plans to achieve a positive financial result based on the results of 2015.

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When conducting a desk audit, the tax office may request documents, explanations or clarifications in the submitted report.

Each request has its own response time frame.

If you have requested documents, respond within 10 days. If you do not have time to prepare the documents, you need to send a notification to the inspectorate indicating the reason for the delay and the specific date for fulfilling the requirement.

If tax authorities require clarification or clarification, you must respond within five days. There is no deferment for such requests. For late execution of a request - a fine of 5,000 rubles. For a repeated violation within a calendar year - another 20,000 rubles, and for each document not submitted - 200 rubles.

Service checks the income tax return indicators with:

VAT declaration,
accounting reports,
statements of current accounts.

If discrepancies are found, a demand may come (you will need to give an explanation or make changes to the declaration.

The tax office also sends a request if a return is filed that reflects a loss.

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Example 1 :

EXPLANATORY NOTE

on the causes of losses reflected in the income tax return

in a year

LLC "A" was registered on "Date"

The main activity of LLC “A” is “Type of activity”.

Financial and economic analysis of the company’s activities for __ year showed that

the reasons for the losses incurred are temporary and related to the start of activities

organization, low income and high costs.

The reason for the small revenue volumes for this period is the low demand for the organization’s products due to buyers’ lack of knowledge of our brand.

High costs during this period were associated with advertising and the marketing policy pursued to develop this market.

As confirmation, we present the structure of the company’s income and expenses for ____ Year

Attach the structure in rubles.

In order to stabilize financial and economic activities and obtain a positive financial result, the following decision was made:

1. review the company’s marketing policy;

2. review the pricing policy for products sold;

3. expand the number of partners selling products to consumers.

Example 2:

Explanations in case the figures in the income tax return differ from the data in other reports

Response to requirement

for the provision of explanations, LLC “A” received a request to provide explanations about the reasons for the discrepancies in income in the corporate income tax return for the _______ year and in the statement of financial results.

There are no errors in the reporting. Discrepancy _________ rub. - this is the amount that the organization received from the sole founder. When determining the tax base for income tax, such income is not taken into account (subclause 11, clause 1, article 251 of the Tax Code of the Russian Federation). And in the financial results statement this amount is reflected in line 2340 “Other income”.

We enclose a transcript of this line.

Example 3:

Explanations from the Federal Tax Service: why revenue in VAT and income tax returns is different

Response to request for clarification

LLC “A” received a requirement to provide explanations about the reasons for discrepancies in income in the VAT return for the first quarter of 2021 and in the corporate income tax return for the first quarter of 2020.

There are no errors in the declarations. Discrepancy ________ rub. – this is non-operating income, which was taken into account in the income tax return on line 100 of Appendix 1 to Sheet 02,

including: – ____ rub. – interest on the loan (clause 6 of Article 250 of the Tax Code);

- _____ rub. – the amount of overdue accounts payable including VAT (clause 18 of Article 250 of the Tax Code of the Russian Federation). These amounts are not included in the VAT tax base on the basis of paragraph 3 of Article 149 and paragraph 1 of Article 146 of the Tax Code of the Russian Federation.

Encyclopedia ProfiRost, 02.09.2020

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Explanatory note on taxes

Currently, businesses may be required to provide an explanation to the tax office regarding VAT. This is the case if, when sending them an updated declaration, the amount of tax payments is less than that indicated in the original version.

The explanation for VAT, as well as the explanation for losses to the tax office, is drawn up in any form and supported by the signature of the head of the organization. It indicates the indicators that have changed in the declaration, which became the reason for reducing the tax amount. Among other things, it would not be superfluous to indicate the reason why different information was indicated in the original declaration. This may be an error in calculation due to misunderstanding of legislation or program failure and other similar factors.

Why write an explanation?

Quite often, tax specialists have various questions based on the results of reports submitted by a tax agent. In such situations, inspectors send a letter to the organization asking for clarification. Most often, problems arise due to any contradictions, inaccuracies and errors identified in the declarations, inconsistencies between the data available in the tax and indicated in the reporting documentation of the enterprise, as well as due to the lack of profit based on the results of work in the reporting period, and even less especially with obvious losses.

We should not forget that income tax is one of the main sources of budget formation, which means that tax authorities monitor transfers in this tax area especially closely.