Under what conditions can a provision be deducted?
A provision is a future expense or loss that is not yet effective at the end of the fiscal year. It will nevertheless be deductible from the company’s taxable income.
Who can fund?
Sole proprietors (EIRL) and companies carrying out an activity falling under industrial or commercial profits (BIC) or subject to corporation tax (IS) may make provisions. In principle, this excludes liberal professionals making non-commercial profits (BNC) subject to “cash accounting”.
The inclusion of provisions enables the company’s actual economic situation to be reflected as accurately as possible, for example the damages that the company will have to pay as a result of a current lawsuit.
The different categories of provisions
There are three main categories of provisions:
Provisions for risks and expenses: the list of these provisions is long because in principle, all operating expenses can be the subject of a provision. The most common ones are provisions for personnel expenses (in case of dismissal, remuneration), provisions for taxes (taxes must be deductible), provisions for litigation, provisions for works (only concerns major works that can be spread over several years).
Provisions for depreciation: these may concern the loss of value of inventories or fixed assets (investments).
Regulated provisions: otherwise known as fiscal provisions, they are expressly instituted by law, such as the provision for price increases (which must be higher than 10%). This provision could be interesting in the current inflationary context, allowing a reconstitution of the company’s stocks.
Conditions for deducting provisions
For a provision to be deductible from taxable income, it must meet 4 conditions:
The provision must allow for a loss or expense that is itself deductible.
The loss or expense must be clearly specified. The provision must therefore be valued with sufficient approximation according to the applicable accounting rules.
The loss or charge must be probable.
It must result from current events, e.g. an event occurring after the end of the financial year is not deductible.
At the accounting level, and in order to be deducted from the result, the provision must be regularly recorded in the accounting entries for the year in accordance with article 39-1-5° of the CGI.
Provisions must also be included in a special table to be attached to the income tax return for the year. Failure to comply with this obligation is punishable by a fine of 5% of the undeclared amounts under article 1763 of the CGI (reduced to 1% if the omitted provisions are deductible).
The fate of provisions
The provision has by definition a provisional character, and when it has been irregularly constituted or when it is not justified, the sanction is the reintegration of its showing in the taxable profits. However, when it has been regularly provisioned, three situations may arise, depending on whether the provision is used in accordance with its purpose, becomes irrelevant or is diverted from its purpose.
When the loss or expense is used for its intended purpose, the provision is effectively deducted from taxable income.
When the risk of loss or expense does not materialize, the provision made in this respect becomes irrelevant and the company should reintegrate it into the corresponding taxable profit, failing which the administration will proceed with the rectification.
Finally, if the provision is diverted from its purpose (non-conforming use), it must also be reinstated in the closing balance sheet of the same fiscal year; in the event that the recovery period is time-barred, the administration may no longer reinstate the provision.
As a manager or company director, it is in your interest to take the necessary precautions before resorting to a provision and as we have seen in this article, the tax deductibility of provisions is strictly regulated. The auditor may reinstate in the taxable result, the provisions irregularly deducted during the fiscal year.
In this field, your tax advisor in Paris, AlterTax Avocats, is used to dealing with these issues, in addition to the mission of your Chartered Accountant. We can also assist you during your tax audit. Do not hesitate to contact us.
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