Can the loss incurred in 2023 as a result of inflation adjustment be deducted from 2024 earnings?
Financial statements dated 31/12/2023 are subject to inflation adjustment regardless of whether the conditions for inflation adjustment are met. The profit/loss difference arising from the inflation adjustment is recognized in the retained earnings account. Retained earnings determined in this way are not subject to tax, and retained losses are not recognized as losses.
Tax Procedure Law Communiqué No. 555;
Adjustment process
ARTICLE 12- (1) Taxpayers within the scope;
a) The balance sheet for the end of the 2023 accounting period will be prepared without taking into account the provisions regarding inflation adjustment.
b) Inflation adjustment will be made to be valid for the balance sheet of the end of the 2023 accounting period and the tax base for the 2023 accounting period will be calculated over the profits determined according to the financial statements before the adjustment.
c) The balance sheet issued at the end of the 2023 accounting period will be subject to inflation adjustment in any case.
(2) According to subparagraph (7) of paragraph (A) of Article 298 of the Law No. 213
a) In the event that the conditions for inflation adjustment reoccur after an accounting period in which inflation adjustment is not applied, inflation adjustment shall be made starting from the most recent period in which inflation adjustment is made.
b) Retained earnings determined in this way shall not be subject to tax, and retained losses shall not be recognized as losses. However, in the determination of the tax base, previous year financial losses are taken into consideration with their book value.
c) Accumulated depreciation shall be adjusted by taking into account the rate of increase in the value of the asset at the balance sheet date after the adjustment.
ç) If the inflation difference accounts of the passive items arising from these transactions are transferred to another account or withdrawn from the enterprise in any way, they are subject to tax in this period without being associated with the earnings of the periods in which these transactions are made. However, inflation differences of equity items can be offset against prior year losses arising from the correction or added to the capital by corporate taxpayers; these transactions are not considered as profit distribution.
In addition, the profit/loss difference arising from the inflation adjustment of the balance sheet at the end of the 2023 accounting period is recognized in the retained earnings account. Retained earnings determined in this way shall not be subject to tax, and retained losses shall not be recognized as losses.
(3) The correction of the balance sheet for the end of the 2023 accounting period shall be made in accordance with the provisions of paragraph (A) of the repeated Article 298 of the Law No. 213, the provisions of the provisional Article 33 and the procedures and principles set out in this Communiqué.
(4) Since the tax base for the 2023 accounting period should be determined according to the financial statements before the correction, the depreciation expense for the 2023 accounting period will be calculated over the values before the inflation correction.
Source: Istanbul Chamber of Certified Public Accountants
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