Under the Japanese Corporate Tax Law, various tax incentives are available for small and medium-sized enterprises (SMEs).
The definition of SMEs is explained in another article.
This article deals with the popular tax benefits available to SMEs.
Reduced corporate tax rate
The basic corporate tax rate is 23.2%. For SMEs, a lower rate of 19% is applied to an annual income of JPY 8 million or less.
Tax losses carry-forward
Tax losses carried forward are incurred in the fiscal year beginning within 10 years prior to the start of the current fiscal year and are deducted in order from oldest to newest.
For SMEs, deductions of tax losses carry-forward are allowed up to the amount of taxable income for the fiscal year, and for non-SMEs, the maximum amount is 50% of the taxable income for the fiscal year.
However, even for non-SMEs, there may be exceptional measures due to the influence of the coronavirus, and the deduction limit may exceed 50%.
Tax losses carry-back
If a SME that generated income in the previous fiscal year and paid corporate tax has a loss in the current fiscal year, it can apply the loss in the current fiscal year to the income in the previous fiscal year and have the corporate tax paid in the previous term refunded.
Carryback of tax losses is generally available for one year for national corporation tax purposes, and it does not apply to local taxes.
Tax losses carry-back also has exceptional measures for coronavirus, which may be available to non-SMEs.
Entertainment expenses are expenses paid for entertainment and gifts to business partners and customers including prospective customers.
SMEs can deduct the entire amount of entertainment and gifts expenses of JPY 8 million or less per year. On the other hand, non-SMEs can only deduct 50% of entertainment expenses (excluding gifts).
Fixed assets and investment incentives
Several tax incentives are available to SMEs to encourage investment. Many of these incentives are available in the form of additional depreciation or special tax credits.
For example, if SMEs purchase or produce qualifying machinery equipment and software that meets certain requirements, they can choose between a 30% increase in depreciation or a 7% tax credit on the asset.
Another tax incentive for SMEs is that depreciable assets with an acquisition cost of less than 300,000 yen are eligible for immediate expensing of the entire amount (however, the annual total is limited to 3 million yen). As a general rule, non-SMEs must record depreciable assets of 100,000 yen or more as fixed assets and depreciate them over their legal useful lives.
Tax incentives associated with policy perspectives on job growth
In addition, there is also a tax incentive that allows SMEs that increase the amount of salaries paid to their employees by 1.5% or more from the previous fiscal year to deduct 15% of that increase from their corporate tax amount.
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