Having a company can result in initial losses or permanent losses. Tax deduction loss company alwasy possible?
Setting up a company does imply you make investments. An old saying in the Netherlands is that the costs come first before you make a profit. This is very true as creating a website, business cards, telephone account etc all cost money. Most of the time you have no client yet, hence the costs come first, but you hope a client will follow soon.
Setting of loss against income
The moment the clients come, you hope to make good the costs you made. The result is that either your result is negative or a little positive in the initial start up period. The ultimate goal is to have a permanent high flow of income and low flow of costs.
The Dutch tax year equals the calendar year. When you set up the company in year 1 and you make a lot of costs, you can set off the initial loss against positive income. This loss compensation can be made against three previous tax years and nine following tax years. The tax assessments of the year against which this year’s loss is being set will be updated into a lower taxable amount( read refund).
In year 2 you hope to make a good turnover and little costs. In year 3 you hope to be more successful etc. But what if that is not happening? What if you do not make more turnover than costs?
No source of income implies no deduction of losses
A loss can be set off against positive income only under the assumption that the loss comes from a source of income. A source of income does not need to be in place immediately, the Dutch tax office gives you a three year holiday on this matter. After three years you should be able to proof what it is. A source of income or a hobby.
A puppy trainer started her puppy training school in 2001. The average turnover in the years 2001 up to 2013 was EUR 4.500. However, the costs to maintain the puppy training school exceeded the turnover during this timeframe, with exception of 2012. In that year less costs than turnover was made, but the tax office and the court both had the opinion that this was more an exception. From 2013 onwards again more costs were made than profit.
Hobby is not a source of income
The puppy training school is therefore not regarded a source of income, but a hobby. The difference between these two is that costs of a hobby are not tax deductible, neither do you need to report the turnover of this hobby.
The consequence is that you cannot set off the loss made against previous years income. The moment your hobby exceeds the hobby status, implying you do earn more turnover than costs made, the company becomes a source of income again and will be subject to taxation.
Would a business plan help you in this matter?
Personally I think not. A business plan is good for yourself to put your ideas on paper. Putting your ideas on paper make them a quantifying substance that you can judge a little later whether or not it is actually achievable. A business plan is good to remember your intentions or to show your intentions to others.
Our opinion is that you simply have to execute the thoughts you have on starting your business. Many persons have successful business ideas on their mind and only a fraction of these persons actually achieve their ideas and only a fraction of those persons are indeed successful.
Do not terminate your day job immediately, but do achieve your goals in your private time.
Orange Tax Service
We will be able to assist you with the value added tax filing of your company, the reporting of the result in your income tax return and fiscal advise with respect of the continuance of the company.
Having a company can be simple, but that depends on how you look at the tax events. We explain how easy you can process the bookkeeping, if that is followed, having a company can be a walk in the park tax wise. Contact us for more information on the subject.