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Accounting and Fiscal Closure 2020

The CONSEJO GENERAL DE ECONOMISTAS DE ESPAÑA ( Registration of the Fiscal Advisory Economists – REAF and the Accounting Economists -EC) have prepared a document related to the accounting and fiscal closure 2020, they draw attention to certain aspects of the closure that cannot be ignored, they warn about the most novel doctrinal or jurisprudential criteria, they warn of the normative changes that are coming and they indicate the possibilities of tax planning that these modifications originate, all of them synthesized in 85 Recommendations.

The original document (Spanish version) can be obtained in the following link

Recommendations:

  1. Assets: Property, plant and equipment (NRV 2 and 3 of the PGC). Review valuation of fixed assets in progress, and possible capitalization of expenses (acquisition price components). Review amortizations and record of possible deterioration. Adjust future amortizations to new estimates of useful life, to avoid having fully amortized fixed assets and in operation. Distinguish and correctly record repairs, extensions, improvements and renovations.
  1. Verify rental contracts, and distinguish between financial and operating leases.
  1. Intangible Fixed Assets (NRV 5 and 6). Review the R&D Expenses that meet the conditions to be activated. Review its amortization, as well as its possible deterioration, with special attention to Goodwill.
  1. Carry out a review of the inventories, and regularize the differences that may exist between the permanent inventory and the actual physical inventories, correctly applying the methods of valuation of inventories (acquisition price, production cost, FIFO, weighted average price, etc.).
  1. Recording possible stock impairments and document impairment losses.
  1. Checking if the shutdown of operations at closing has been carried out correctly. Balance the entries in the warehouse in physical units with the invoices received, and the exits with the invoices issued. Take into account the goods in transit (INCOTERMS, FOB, CIF conditions, etc.).
  1. Take into account the goods in storage. Goods that are not from the company, but are in storage in our warehouses and vice versa.
  1. Registering the absentee and discounts accrued, both on purchases and sales.
  1. Financial instruments (NRV 9). Reviewing the classification of financial assets, the application of amortized cost, fair value, etc. Verify the correct accrual of interest and record and document possible impairments.
  1. Reviewing the outstanding balance of customers and other debtors. Depending on its amount, its relative importance or the composition of the balance, check with the respective debtors and their coincidence with it.
  1. Carrying out an accounting of the boxes, and adjust the possible differences that may exist between the balance of the boxes and the amounts actually existing with the income statement.
  1. Performing a reconciliation of each and every one of the banks, adjusting the possible error that may be found, such as the accounting of bank commissions, as well as possible financial income or expenses and the corresponding withholdings.
  1. We must request the missing invoices from suppliers, as well as public deeds or other documents that prove the operations carried out throughout the year. For this, it is necessary to obtain from the banking entities the balances at December 31 of the accounts and the valuation and returns of the financial assets, as well as the amount of the withholdings that have been applied to us.
  1. It is of interest to know at the end of the year the exchange rate in force, which is necessary to value the treasury accounts, credits and debits and the differences with the book value, to charge or pay them to Profit and Loss, according to the valuation of items in foreign currency.
  1. Reviewing the equity situation of the company, based on the results for the year, in order to rule out possible equity imbalances.
  1. Reviewing the amounts resulting from the close of the fiscal year, in accordance with the audit limits as well as the rest of commercial obligations.
  1. Reviewing other contributions from partners, as well as the balance of account 551 «Current Account with Partners and Administrators» and account 555 «Items pending application» and make the relevant adjustments, as they are accounts that should have a value close to zero at year-end.
  1. Financial instruments (NRV 9). Reviewing the classification of financial liabilities; review the application of amortized cost, fair value, etc. Verify the correct accrual of interest.
  1. Reviewing the outstanding balance of debts and other creditors. Depending on its amount, its relative importance or the composition of the balance, check with the respective creditors the coincidence of the same.
  1. Requesting debt certificates from the different public administrations (AEAT, TGSS, Autonomous Administrations, among others) and comparison with the outstanding balance with them, taking into account current taxes accrued and pending presentation (VAT, payments on account, etc.).
  1. Reviewing the correct accounting of VAT and withholdings, and make tables with tax returns.
  1. Reviewing subsequent events, (NRV 22nd) and verify if there are changes in estimates, errors or changes in criteria. Remember that errors and changes in criteria have a retroactive effect (charge or credit to reserves) while changes in estimates have a prospective effect (effect in the following years).
  1. Reviewing grants, donations and bequests (NRV 18). Distinguish between capital grants, operating grants and grants received from partners.
  1. Transferring capital grants to income based on the amortization of subsidized assets (account 746 Grants transferred to income for the year).
  1. Reviewing the provisions and if there are contingencies or pending litigation. Distinguish if they should be recorded and / or reported in memory.
  1. Determining the result before taxes and record the income tax expense, in accordance with tax regulations.
  1. Evaluating how much the net amount of the turnover for this year will be and, if it were to exceed € 10,000,000 by a little, the realization of some income could be deferred for next year, in order not to exceed that limit and that this could lead us to abandon the regime of small companies (ERD) or enter into an extension of it.
  1. If the entity was established in 2020, to determine if a company is small in size, the net amount of turnover (INCN) that must be taken into account is that corresponding to the time in which the company has been developed effective activity, but rising annually.
  1. With the previous figure, we will also know the limit to the maximum deductible amount of the expense of attention to clients and suppliers, which is precisely 1% of the INCN. If we were to exceed this limit, it would be appropriate to postpone, as far as possible, such expenses to 2021.
  1. If it is convenient for the entity to obtain liquidity by transferring properties with a profit, it will be convenient to sell, first, those acquired between May 12 and December 31, 2012, since it will not be taxed for half of the profit, unless acquired or transferred it to a group company.
  1. If you are engaged in the rental of real estate and you want them to be involved in the economic leasing activity, for the next year, you may agree to hire a person with a full-time employment contract to manage the lease. Note that the administration may ask you to prove the existence of a minimum administrative workload that justifies the need to employ the person.
  1. Analyze the sales or provision of services of the company that can benefit from the special rule of forward operations. In this case, a negative adjustment must be made to the accounting result for the proportional part not collected. On the contrary, when a term of an operation of these characteristics, carried out in previous years, has expired, the necessary positive adjustment for the proportional part of the income that corresponds to the expired term cannot be forgotten.
  1. In the event that the deferred operation is a service, it will be necessary to know the net benefit of the same (subtracting the associated expenses from the income), because the income is not divided, but the net benefit of the provision of services.
  1. If the company has carried out a deferred price operation, it must take good care that this can be proven and that the contract specifies when the terms expire because, otherwise, it could be understood that it is not an operation of this nature Rather, there have simply been delays in collection.
  1. If the entity has carried out a real estate exchange by handing over land in exchange for receiving a future building, in a period exceeding one year, it may avail itself of the term operations rule.
  1. If the entity has recorded an impairment of any item of tangible or intangible fixed assets, the expense is not deductible, so a positive adjustment will have to be made, although the tax expense may be allocated as it is amortized.
  1. If the entity is reversing, in fifths, the impairment of shares in unlisted companies, remember that this year you must reverse the entire outstanding amount.
  1. In the event of an accounting reversal of the impairment of an item of fixed assets, it will be necessary to analyze what happened when it was allocated: if it was a tax deductible expense, now it will have to be included in the tax base but, if it could not be deducted, in this year there will be to make a negative adjustment so that it is not part of the tax base.
  1. If during this year you have recorded a loss from the sale of shares or holdings to a group entity, it must be borne in mind that it cannot be deducted until they are transferred to a third party outside the group, provided that it is not a significant participation and, if it is of a non-resident entity, it is necessary that, in addition, the requirement of an agreement or similar tax with a minimum rate of 10% be met. On the contrary, if it was in this year when the shares transferred within the group with losses left the group, the loss not deducted may be recognized, but taking into account that it will have to be reduced in the positive income obtained in the transfer to third parties.
  1. Checking whether depreciable items have been transferred at a loss to a group entity. In this case, it is advisable to ask the acquirer for the amortization table to be applied, since the loss can only be deducted at the same rate as the transmitted item is amortized.
  1. At the end of the year it will be necessary to check whether the income and expenses recorded have been accrued correctly. In the case of bankrupt entities that have approved a write-off in 2020, they must make a negative adjustment to the corresponding accounting income that will revert in the following years at the rate at which the financial expenses of the debt accrue.
  1. Checking if the company incurred expenses in previous years that have not been accounted for or deducted because, if they correspond to a non-prescribed period, in general, they may be accounted for and deducted in this year.
  1. At the end of the year is a good time to analyze the tax depreciation methods and apply the one that best suits to reduce the tax base, and even take the opportunity to request a special depreciation plan from the Administration.
  1. Identifying new items of property, plant and equipment with a value of less than € 300 and take advantage of them to amortize them freely, although taking into account the maximum annual limit of € 25,000.
  1. If the entity has been incorporated in 2020 and applies the freedom to amortize new items whose unit value does not exceed € 300, the limit of € 25,000 for all these assets will be prorated based on the number of days in the tax period regarding the year.
  1. ​​If the entity is going to deteriorate inventories in the accounting, and to deduct this expense for tax purposes, it is convenient to prepare the impairment test, such as an expert’s report, because the Administration may require it.
  1. If at the end of the year you have doubtful customer balances and 6 months have elapsed from maturity to December 31, you still have time to claim the credit from the debtor so that the expense is not considered a liberality. In principle, even if the aforementioned period has elapsed, the credits against Public Administrations will not be able to be deducted, unless there is an arbitration or judicial procedure, or when the debtor is a related person, unless it is in bankruptcy.
  1. Aside from the deductibility of the expense for bad debts of credits exposed, the ERD, for the rest of the credits of their balance (excluding those that they have against Public Administrations and related persons or entities) can deduct an impairment expense of up to 1% of the sum of those balances. If the entity ceases to be ERD, the previous global allocation must be taken into account in the individual allocations.
  1. In addition to the expense for impairment of credits derived from possible insolvencies of debtors, it is necessary to separate the credits that will definitely not be collected. If the corresponding accounting loss has been reflected, that expense will be deductible without further requirements, although, of course, the irreversibility of the loss will have to be justified.
  1. If the entity has increased capital, it should not forget to make a negative adjustment for expansion expenses that will have been accounted for with a charge to reserves.
  1. Checking certain expenses such as gifts to members who attend the Shareholders’ Meeting or dividends to non-voting shares, recorded as financial expenses, since they are not tax deductible because they are remuneration to own funds.
  1. Paying special attention to default interest. Those accrued from deferrals or installments will be deductible, and those from inspection records only if they have accrued in 2015 and subsequent years. In both cases, they are deductible up to a limit of 30% of the operating profit, together with the rest of the financial expenses. Also, do not forget to make the positive adjustment to the accounting result corresponding to the expenses of fines and penalties, as they cannot be deducted.
  1. It is convenient to analyze company operations and exchanges that, without having had an impact on the accounting result, must be valued at market value and, therefore, originate a difference between the tax base and the former.
  1. Identifying whether during the year the company has carried out operations with related parties, because they will have to be valued at normal market value and it is advisable to prepare the documentation on them that, except for exemption from this obligation, may be required by the Administration.
  1. If you are a professional partner of a company with professional activity and provide professional services, the entity has material and human resources and does not want to discuss the assessment of the remuneration to partners for these services, you should know that the remuneration of the Professional partners have to achieve at least 75% of the difference between income and expenses before deducting their remuneration. In addition, it is also necessary for the remuneration of each partner to equal or exceed the average remuneration of workers who provide similar services multiplied by 1.5. In case you do not have those workers, the minimum will be 5 times the IPREM.
  1. If the company has transferred shares of another in which it had 5% or more, obtaining capital gains, you have to find out if said company is patrimonial because, in that case, the exemption of that income will only reach the part of the same that corresponds to the increase in undistributed profits generated during the holding of the participation, and not to the tacit capital gain.
  1. In the event that the entity has received dividends, it is necessary to know the business organization chart and detect the ultimate origin of the same. The exemption will depend on whether the investee is a holding company and the degree of indirect participation in the second or subsequent level sub-subsidiaries.
  1. If the entity has profitably transferred shares of an entity based abroad, in order to apply the exemption, in addition to the fact that it is a significant holding, it must be verified whether it is a country that has an agreement with Spain to avoid double taxation. Otherwise, it will be necessary to see if in that country there is a tax of an identical or analogous nature to our tax with a nominal rate, in the exercise of the sale of, at least, 10%.
  1. If the entity has transferred participations with losses and they are deductible for having a participation of less than 5%, it must take into account that it will have to reduce said loss -making the corresponding positive adjustment- in the dividends received from that investee since 2009, Unless he had paid for them.
  1. If it is a partner company of another that is going to be liquidated with losses, do not forget that, from a tax point of view, you will have to reduce them in the dividends you have received in the last 10 years if they were not taxed on the date .
  1. If the entity is going to sell participations with losses of a company of which it owns more than 5% of the capital, it will not be able to deduct them, but it can consider carrying out the sale in two phases: first, the participations until leaving the portfolio for below 5% (without being able to deduct the losses), and second, after one year, the rest (the last loss being deductible).
  1. If the company has a trading portfolio on its balance sheet, at the end of the year it must be put at fair value and, in the case of non-significant holdings, both losses and profits will form part of the tax base (in the case of actions of non-resident entities to integrate the losses, in addition, the requirements of an agreement or similar tax and a minimum rate of 10% must be met).
  1. It is convenient to compare the amount of the entity’s own funds, at the end of the year, without taking into account the results of the year, with the own funds at the beginning, without taking into account the profits of the previous year (and without considering other items that the tax law establishes). If there is an increase, we can reduce the tax base with the capitalization reserve, always with the limit of 10% of the tax base prior to this reduction and the compensation of BIN s.
  1. If in a previous year the base was reduced by the capitalization reserve and said reduction was limited by 10% of the tax base, it is convenient to see if in this year the entity can reduce the rest, in addition to what, in Where appropriate, proceed for the increase in equity for the year, always with the joint limit of 10% of the tax base.
  1. If in previous years you applied the reduction due to capitalization reserve, do not forget to check that the requirement of maintaining the increase in equity has been met because, otherwise, you must take into account that in the self-assessment of the tax it will be added to this year’s installment, the corresponding amount of installment saved plus default interest.
  1. In order to reduce the tax base using the capitalization reserve, it is advisable to endow the legal reserve for the minimum established by the commercial regulations. In this way, the company will be able to allocate more voluntary reserve and, therefore, it will be able to reduce the base with the capitalization reserve by a higher amount.
  1. In the event that the entity brings in many accumulated reserves from the past, it may be convenient to distribute them this year and provide the capitalization reserve for the next. In this way, compliance with the maintenance requirement will force you to immobilize less equity with the same tax benefit.
  1. Review the Bylaws of the company to verify that the position of the administrator is remunerated and to be able to deduct the accounting expense for his remuneration. In the case of administrators with executive functions, remuneration must also appear in the Bylaws.
  1. In the case of an ERD that is increasing its workforce (its average workforce for 2020-21 will increase compared to that of 2019, and assumes that it will maintain the increase for another 2 years from 2021), if it invests before the end of the year in elements new property, plant and equipment or real estate investments, the tax may be deferred by applying freedom of amortization to those items at a rate of € 120,000 for each person / year of staff increase.
  1. Another possibility of deferral for an ERD can be to provide the leveling reserve, with this will achieve, at least, a deferral of up to 10% of the quota that corresponds to 10% of the taxable base (which can be reduce to an absolute maximum of 1,000,000 euros).
  1. Bearing in mind that if you are a newly created company and you have made a profit and apply this year the reduced rate of 15%, you will not be able to apply the leveling reserve.
  1. If the company, in a previous year, reduced the tax base by applying the leveling reserve, if in this year it has a negative tax base, it must offset it up to the amount of said negative base with the leveling reserve of the previous years.
  1. If in 2015 you applied the equalization reserve and you still have a pending balance to be added to the base, in this exercise you must make the corresponding positive adjustment for the total amount still pending because the 5 years established by the legislator to integrate the amount are already completed reduced.
  1. If it is the first year in which a new company obtains profits and, therefore, it can apply the tax rate of 15%, it is possible that it is interesting not to compensate the negative tax bases that it has pending, even if there is no time limit. for this, and begin to compensate them when the rate is the general 25%. In this way, the reduced rate tax benefit will be used.
  1. If it was established in 2020, remember that the amount of the leveling reserve may not exceed the result of multiplying € 1,000,000 by the proportion between the length of the tax period and the year.
  1. Checking the debts of the entity prior to October 7, 2015 because they will have prescribed in this exercise. If you choose to cancel them, keep in mind that the payment to reserves must be taxed.
  1. If the company, in 2013 and 2014, due to its INCN, the amortization expense was limited, being able to deduct a maximum of 70% of the amortization recorded, on the 30% that is recovering with negative adjustments, it may apply a deduction of 5% , to compensate that the cost recovery is carried out at a lower tax rate.
  1. If the company is going to make donations, from a tax point of view it will be better to do it to the same entity that was already donated in the last two years, as it may benefit from a 5% more deduction, provided that the amounts have been equal or higher each year. You cannot forget to make the positive adjustment to cancel the expense that will have been recorded and that is not deductible.
  1. If you have increased the workforce of workers with disabilities, you may apply the deduction for job creation for this, although it must be taken into account that this incentive is incompatible with the freedom of amortization with job creation that companies can apply. of reduced dimension.
  1. If the entity has carried out or is thinking of investing in R & D & I activities, it is advisable to request a reasoned report from the Ministry of Economy and Competitiveness or body attached to it, or to submit a query to the General Directorate of Taxes that will be binding, and even that it reaches an agreement with the Tax Administration on the expenses and investments to be made.
  1. If you are applying the special financial leasing regime, confirm that the amount of the installments corresponding to the recovery of the cost of the asset remains the same or is increasing throughout the contractual period because, otherwise, you must enter the installments corresponding to the excess of the tax expense applied to that accounted for by amortization.
  1. Before the end of the year, it is convenient for you that your subsidiaries, in which you have a significant stake, distribute dividends to you, because that way you can apply the exemption for the entire financial income. If you receive it from 2021, you can only apply the exemption for 95%.
  1. If you are thinking of transferring a significant profit share, you may exempt all of it if the transaction is carried out before the end of the year. As of 2021, the exemption can only be applied 95%.
  1. Do not forget to make a negative adjustment to the accounting result for the amount of charges to reserves that are considered tax deductible expenses, such as those recorded in error that occurred in previous years.
  1. If you are thinking of acquiring shares in companies, in a percentage lower than 5% of the capital, it is convenient for you if the acquisition cost of the portfolio exceeds € 20,000,000 and buying them before the end of the year. In this way, during the next 5 years you can apply the full exemption for dividends or for the profit produced on the sale of said shares.