Starting your own company can be a dream come true. However, your company making losses only might challenge the tax office to indicate it is not a company, it is a hobby.
A company – one man company/private company
A company from a tax point of view is source of income. The first three years of existence the tax office gives you a kind of holiday with respect to the income. That implies you are not required to be profitable immediately, because if only immediate successful entrepreneurs are regarded companies, we would not have a lot of companies.
A company – BV company
This article does not apply to a BV company. A private company loss is set off against other income or income of previous years. A BV company loss can only be set off against the previous year or future profitable years within that BV company. When that BV company keeps on making losses, the money simply runs out. For a private company the loss can yield a tax refund from tax paid on side employments or previous years income.
A company making losses
In the event your one man company keeps on making losses, even after a three year period, then the tax office determines your company not as a source of income, but as a hobby. The costs of a hobby are not tax deductible.
The moment your company is regarded a hobby and you have already set off the losses against possible employment income you had at the same time. The loss compensation will be challenged and you are to pay back the yielded tax refund.
Eco-friendly polish – court case
In October 2017 the 2010 income tax return of a couple was subject in a court case. I mention this time line to put the time frame into perspective.
The lady started a one man company, the one man stands for one man holding the equity but it can indeed be a woman as well. In the years 2007 and 2008 the company made a total loss of EUR 17.193. The woman had no taxable income to set off against this loss, hence her husband made a claim for the amount of EUR 7.026 out of the EUR 17.193 in his 2010 income tax return.
The tax office challenged both the losses as who compensated the losses. The losses were challenged on the fact that the company never made a positive income and there were also no indications the company was able to make a profit in the near future. That made the company a hobby, and the losses were not open for compensation with future positive taxable income.
Moreover, the tax office challenged the fact that the husband who was not the entrepreneur compensated the losses of his wife in his income tax return. In order to be able to claim a loss, the tax office needs to have formalized the loss. And if it is formalized, the loss needs to be in the name of the tax payer that would like to compensate the loss. As the husband did not have the company, he could not have had a loss compensation statement in his name, hence the EUR 7.026 the husband claimed had to be undone.
The husband appealed with the high court, but the high court did not see any rule not being applied incorrectly, hence dismissed the case without even making a comment. That obvious the incorrect tax filing was processed.
Orange Tax Services
We often get future entrepreneurs in the office. They have made a business plan and proudly present that to us. But all business plans are the same. A loss made in the first and also second year, then break even and in the fifth year a nice profit.
We are not much bothered by business plans, as if someone is able to predict the future, that someone would be wealthy already. In our opinion you need to JUST DO IT. Start your plan, stick to the plan, regardless was other people say to you. That other people being negative most like have employment, you will notice that the entrepreneurs will encourage you.