Liquidity through tax loss carrybacks

In view of the dramatic economic effects of the coronavirus pandemic, the legislator has reacted by providing further relief: The Second Coronavirus Tax Relief Act temporarily, but at the same time significantly, improves the possibility of tax loss carrybacks.

Significant increase of the maximum amount to EUR 5 / EUR 10 million

Losses of the years 2020 and 2021 can be carried back to the previous year in amounts of up to EUR 5 million (EUR 10 million in cases of joint assessment). They then retroactively reduce the taxable income – for 2019 in case of losses in the year 2020. And if 2020 was still positive, the same applies accordingly for a loss carryback from 2021.

Reduction of advance payments for 2019

Consequently, the higher loss carryback is supposed to be considered in the assessments of the prepayments for 2019. Upon application of the taxpayer, tax prepayments already made for 2019 will be reduced by a flat rate of 30 percent of the total amount of the income applied, but not exceeding EUR 5 million (EUR 10 million in cases of joint assessment) and refunded. Income from employment does not increase the flat rate amount, as there typically are no losses.

An expected higher loss carryback can be considered when detailed evidence is provided. For the flat rate amount it is sufficient that the prepayments for 2020 have been reduced to zero euros. The Act assumes that in such cases negative income is to be expected for the full year. For the taxpayer this means a real right to choose. The only risk for the taxpayer lies in the accordingly higher additional tax payment for 2019, which, however, will be deferred without interest until the expiry of one month after the announcement of the (first) tax assessment for 2020.

The "provisional" loss carryback

In order for the relief to reach the taxpayer quickly and unbureaucratically, the "provisional loss carryback" is supposed to be used in the assessment for 2019 already to have an effect on liquidity. Analogously to the reduction of the prepayments, the total amount of income will be reduced by a flat rate of 30 percent – without income from employment being considered and limited to a reduction potential of EUR 5 million (EUR 10 million in cases of joint assessment). For a further reduction detailed evidence is necessary.

With the assessment for 2020 the amount in which a loss can be carried back to 2019 is finally stipulated. The tax assessment for 2019 will be changed accordingly, the filing of a tax return for 2020 is mandatory.

The final loss carryback can also be deducted if and insofar the total amount of income of the previous year includes income from employment. For example, in cases of jointly assessed spouses this can lead to significant additional tax savings compared to the provisional loss carryback.

Loss carryback in case of final assessment for 2019

An application for consideration of the provisional loss carryback for 2020 can also be filed retroactively if the income tax assessment for 2019 is already final: However, in such a case the taxpayer must act quickly and file the application until 1 August 2020 at the latest.

Open questions

Because of the reference from Sec. 8 German Corporation Tax Act the changes made also apply to corporation tax. In spite of the typically higher volumes, the amounts for the individual assessment of taxable natural persons are applied, so that a GmbH can only claim a loss carryback of EUR 5 million.

Corresponding trade tax provisions have not been included in the Second Coronavirus Tax Relief Act. This once again shows the persistence of trade tax owed to municipal financing.

The provision on loss carryforward and minimum taxation remains unchanged, which will impede reconstruction. Many entrepreneurial top performers of our industrial location seem to have been neglected here. If the pandemic continues with undiminished severity in 2021, the legislator can probably be expected to act once again.

BEITEN BURKHARDT supports you by providing strategic advice, so that the liquidity assistance of the Second Coronavirus Tax Relief Act will reach you quickly and unbureaucratically.

Dr Rudolf Mikus

Christine Kruse

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Dr Rudolf Mikus T   +49 69 756095-481 E